We are now late in the economic cycle and this has pushed up market volatility – as have trade and other tensions. But historically a late-cycle environment has often delivered decent returns too. So stay invested, but hedge.
“Growth gazumps geopolitics”
The good news is that the global economy is still growing, despite these political uncertainties – as we put it in one of our themes for 2018, “growth gazumps geopolitics”. The likelihood of a U.S. recession is low, inflation appears under control and the lengthy process of monetary policy normalization – we are approaching the 10th anniversary of the Lehman Brothers bankruptcy – is proceeding relatively smoothly.
“Still some oxygen for equities”
What this means is that there is “still some oxygen for equities” – another of our 2018 themes. We have raised our 12-month S&P target, but are rather more cautious on Europe (due largely to trade concerns) and Japan (due to the possibility of a stronger yen). Emerging market equities have had a difficult first half of 2018, but we still see plenty of positives here, not least strong Asian economic fundamentals.
“Flashlight fixed income”
Stay selective – or “flashlight” – fixed income. We continue to be cautious about sovereigns in an environment of rising rates, and are also slightly wary on high yield. There are tail risks here from Fed tightening and the ECB exit from QE, as well as from tight spreads and the lateness of the economic cycle. We are keener on investment grade, and believe that emerging market hard currency debt will continue to offer opportunities after a mixed start to 2018.
“Explore investment alternatives”
Multi-asset portfolios need to reflect this increase in volatility and a key goal here is diversification. One of our 10 Themes for 2018 was “Explore investment alternatives” and we continue to see opportunities here, either in the less well-trodden parts of conventional asset classes, or in alternative investments. This CIO Insights gives our current views on the different sorts of liquid alternatives (hedge fund) strategies.
We also see the continued relevance of our long-term investment themes – “Tomorrow’s themes today”. We have added AI and smart mobility to secular themes based around infrastructure, cyber security, global aging and millennials.
In the second half of the year, we think that the focus should be on active risk management. A volatile market environment is likely to provide worthwhile returns, but accompanied by high levels of volatility. So we would stay invested, but hedge.
The following regional editions of the full report are available for download:
Our quarterly CIO Insights publication provides a summary of our macroeconomic and asset class views as of July 2018, along with market forecasts and an update on our 10 Themes for 2018.