VIDEO: Investec’s 18-month global investment outlook.
Chief Investment Officer of Investec Bank Switzerland, Annelise Peers discusses a wide range of affairs.
Locally, Cyril Ramaphosa took over as president and immediately found himself facing a number of challenges, including faltering global growth and dysfunctional state-owned enterprises.
How will these and other themes play out in 2019? We asked a panel of Investec Wealth & Investment strategists and other investment brains – from as far afield as Johannesburg, Cape Town, Zurich and London – to answer a set of questions about the outlook for the year.
Please bear in mind that these are personal views of the individuals and do not purport to be a 'house view'. See the latest Global Investment View to obtain the consolidated insights of our Global Investment Strategy Group (GISG) and asset allocation team.
There's consensus on a lot of issues, but divergence on many others. This is not a weakness: diversity means assumptions are questioned and alternative perspectives aired – all of which help shape the decisions of the GISG, asset allocation teams and various portfolios.
Our panel is made up of the following experts:
- Annelise Peers, chief investment officer: Investec Wealth & Investment, Switzerland
- Professor Brian Kantor, chief economist and strategist, Investec Wealth & Investment SA
- John Wyn-Evans, head of investment strategy, Investec Wealth & Investment UK
- Chris Holdsworth, investment strategist, Investec Wealth & Investment SA
- Barry Shamley, portfolio manager in charge of the Opportunities portfolio, Investec Wealth & Investment SA
- Neil Urmson, wealth manager, Investec Wealth & Investment SA
- Ronelle Hutchinson, portfolio manager specialising in multi-manager funds, Investec Wealth & Investment SA
- Bradley Seaward, portfolio manager
AP = Annelise Peers
BK = Brian Kantor
JW-E = John Wyn-Evans
CH = Chris Holdsworth
BS = Barry Shamley
NU = Neil Urmson
RH = Ronelle Hutchinson
BSe = Bradley Seaward
Q&A January 2019
A year ago, we were speaking about synchronised growth as a feature of the world economy. How things have changed! Can the global growth train get back on track?
CH: For sure, but there is likely to be a bumpy ride for six months at least. There is a non-negligible chance that Germany will enter a recession, there is still some Chinese stimulus to come (and perhaps a trade agreement), and the Fed slowing down should ease some pressure for the second half.
JW-E: It's going to be a while before we return to the optimistic levels seen a year ago, given the age of the cycle and the lack of new stimulants. A resolution of the US-China trade situation would be helpful, but the die is cast for a more turbulent relationship between the two countries for several years ahead.
BK: Yes it can, if the world follows the US example and cuts taxes, especially corporate tax rates, and the developed world takes advantage of low interest rates to stimulate spending. Less austerity is called for, in Germany in particular.
BSe: It's hard to see synchronised global growth transpiring, what with the trade war with China and the second-round effects that the trade war has on other economies (most notably, commodity-producing countries which rely on continued Chinese growth).
BS: It can, but this requires a resurrection in confidence, which has been heavily affected by President Donald Trump’s actions.
NU: In the short term, yes, but in the longer term there remain some worrying trends (demographics, productivity, etc).
The Trump factor remains ever present in US and global affairs. With pressure building on the US president and his having a hostile (Democrat-dominated) House to contend with, do you see him dialling back the rhetoric or doubling down?
JW-E: Not really. It's his modus operandi, so expect more of the same. I'm not sure how much the Democrats can do. Being purely obstructive looks negative ahead of the next presidential election. And remember, they are just as hawkish on China.
AP: It is not in his nature to dial down and he will blame China and the Fed for any slowdown in the first half of the year. The positive effect of his tax package is waning and the government shutdown will slow the US economy sharply in the quarter.
CH: I suspect he will have to step back at some point with regard to his desire to build the wall. He does not appear to have sufficient support to push through his agenda.
BS: The only certainty we have with Trump is his unpredictability. I don't expect much change in his erratic behaviour.
NU: I expect him to double down in an attempt to consolidate his base and win re-election.
BK: I would suggest it is the doubling up, not down (as with the shutdown) that is not playing well. Will Trump be the Republican candidate in 2020? With a bit of luck, he will not seek re-election and a normal, pro-business Republican will easily beat a left-wing Democrat.
Trade war fears appear to have been realised in 2018. What needs to happen for tensions to de-escalate in 2019?
BS: A deal with the US and China. I expect China will become increasingly more negotiable as it suffers the effects of trade wars and realises that Trump is probably the most dangerous person in the world to engage with in a game of chicken.
NU: This will moderate as Trump looks to keep the economy on a strong footing.
AP: Trump will have to back down, but the trade wars will continue. This is a normal phenomenon at the top of a globalisation cycle as China, as a new superpower, takes its place.
CH: I think the Chinese need to get the problem solved, whereas Trump is probably under less pressure. The net result is that I suspect they will offer a few cosmetic victories and he will be able to claim a victory.
BSe: Trump would need to go.
JW-E: China needs to back down. It may do so in the short term, owing to domestic weakness, but its longer-term ambitions will remain intact.
Alternatively, could they take a turn for the worse, leading to a breakdown between the US and China? What would the consequences be?
NU: There are a lot of negatives if they do break down, from possible inflationary pressures to South Sea tensions and possible boycotts of Treasury auctions. It's a low-probability event, but the risks are big.
BK: Answer to both questions – if China plays more by the rules that govern international trade, including subsidies to its exporters, the world will be a better place. Trump, by taking on China, is doing the world of trade and business a favour.
AP: This will be bad news for all as Europe, Japan and emerging markets (EMs) are highly leveraged to Chinese growth. The US, which is fairly isolated from the rest of the world, will feel the pinch through the purchase of US Treasuries (or lack thereof from China), and a US dollar that strengthens further and makes the US uncompetitive. This could change the current economic slowdown into a full-blown recession. Even if the worst case does not play out, it will add to volatility.
CH: The costs will be severe. I suspect it is in neither party's interests for this to happen.
BSe: A breakdown between the two economies could spell disaster for the global economy. A continued Chinese slowdown and a weaker US economy do not bode well for global growth.
JW-E: It would be very bad for global trade and probably lead to a global recession (meaning GDP growth of less than 3%).
BS: It's possible, but I think the probability is quite low. Tragically, this sort of scenario, if it plays out, could ultimately end in actual war.
Setting aside the trade issues for a moment, are there other reasons to be worried about the Chinese economy; for example, rising debt levels?
CH: China has an ageing population – so there is a serious risk of people getting old before getting rich. In addition, it isn't at all certain that the previous capex spending was effective. There are concerns about the quality of housing and how much will need to be replaced.
BK: Yes, one should always worry about totalitarians who have the power to make large mistakes. China is now very important to the world. Its economy could do with the full discipline applied by free capital markets to allocate capital, rather than the party doing so.
AP: China has been restructuring the economy and this will continue. However, it will soon start stimulating again. The cyclical weakness does not negate the powerful secular story.
JW-E: Yes, but they are manageable for now. That is why China is expanding its overseas interests, trying to raise the level of intellectual property in output, and encouraging more domestic consumption.
BS: Yes, I think the level of debt is becoming an issue. However, I think there are numerous other levers that the authorities can pull to deal with a slowing economy; for example, the further relaxation of the one child policy.
NU: The problem has been around for a while, but as long as you can print without inflation, the dragon may be okay.
Questions are now being asked about the trajectory of US rates, especially in the light of an inverting yield curve (shorter and longer rates converging). Do you think the Fed will be forced to reduce the number of expected hikes this year?
AP: I believe we will see inflation dropping in the coming months and that the Fed will not be able to increase rates this year. The bond market is normally very good at forecasting the future path of interest rates, and the current flat yield curve suggests that short rates have increased enough.
BK: Yes. The market rules, so no rate increases unless the market (the yield curve) permits. It would take higher inflation expectations to justify rate increases and higher interest rates. This seems unlikely.
BS: I think they (the Fed) are watching developments quite carefully. Ultimately, there is no reason at present to believe they will change course. However, while growth and employment are strong, the equity market can have a material impact on confidence, through the wealth effect, which may start influencing their thinking.
JW-E: Looks like a done deal!
This has an impact on one's outlook for returns in 2019. How do you see things panning out overall for the main asset classes – equities, bonds and currencies?
BS: My sense is that we're in the midst of a correction in equities and, more than likely, we are more than halfway through it. Valuations are attractive and while prices could fall further, one is not going to find the exact low. Therefore, I believe now is an opportune time to be building positions in some of the better quality companies that have experienced serious drops in value. US bond yields could drop further in the short term. However, I'd be more inclined to be reducing holdings of those and investing in better quality EM government bonds. I expect currencies to remain volatile, but once confidence resumes, I expect a bit of US dollar weakness.
NU: US equities, I believe, remain on the expensive side, especially if you normalise margins (using the CAPE valuation model – ie the cyclically adjusted price-to-earnings ratio). I can understand how speculative behaviour may continue, but I remain cautious. Bond yields have fallen already, so little in the way of updates are left. Basically, another difficult, low-return year.
AP: For the first half of 2019 I am overweight in G7 government debt and cash, and underweight in equities. For the second half, I am likely to start selling bonds and using cash to increase the equity allocation.
CH: I see slower growth than in 2018, but if there is no recession in the US, we should see an equity market rally (especially if the trade deal gets sorted out and the Chinese stimulate).
BK: There's a slight risk on higher yield debt over government bonds. The US dollar is unchanged and is not a threat to EM currencies. I do not expect sharply higher government bond yields.
BSe: I believe that global equities will see a shift from developed markets to EMs, where bond yields in EMs tighten and their currencies strengthen at the expense of outflows from richly priced developed markets.
JW-E: Equities – they grind out small gains with higher underlying volatility; bonds – another year of small negative returns. I have no strong view on foreign exchange, but US dollar momentum has peaked.
Trump is not alone in tearing up the playbook of how to run a country. 'Angry politics' and populism appear to be factors everywhere, from Italy in the developed world, to Mexico and Brazil in the developing world. How will this affect volatility and the ability to make meaningful forecasts this year?
BK: What is wrong with popular? I thought that was the purpose of democracy: to encourage popular policies. Will popular be anti-business? It will be anti-immigrant, which is not good for the economy. And protection of jobs is not good for growth.
AP: Populism is, unfortunately, here to stay for many structural reasons, but mainly because of the lack of job creation. This will make markets volatile and not that easy to predict, and I feel this will remain the situation in the coming years.
CH: It isn't going to be easy: the global economic policy uncertainty index has been on the rise for years (see http://www.policyuncertainty.com/).
JW-E: It probably won’t affect forecasting much, but it will continue to put upward pressure on risk premiums. EU Parliament elections in May are a potential flashpoint, with potentially big support for 'extreme' candidates.
BS: Politics has become the major driver of markets and can make us all look like fools with our forecasts over the next 12 months.
NU: Good questions and risks are the downside, given the retreat in globalisation.
29 March is a big day for the UK – we aren't sure at this stage what sort of deal the UK is likely to walk away with as it leaves the EU. But what impact could Brexit have on the European and global economies?
JW-E: Increasingly less impact the further away you go. The UK economy does not have the clout to affect the world, but France, the Netherlands, Germany and Spain will notice the effects.
AP: Any clarity on Brexit will be a relief. At the moment, a soft Brexit or a no Brexit seems to be the expected outcome. Risk assets should rally on any news, bar a hard Brexit. The direction should help the UK, as well as Europe, as many businesses have done nothing in anticipation.
CH: If it’s a successful Brexit (a low-probability event), it will probably be a negative read for Europe. As a result, it probably won't be. The issue is too small on the global scene to make much of a difference.
BK: It all depends on what Britain does with its independence and whether it becomes more or less competitive; though it now looks as if an independent Britain is a step too far.
BS: Too difficult to predict, but I suspect a lot of negativity is already priced in.
Which are the markets / geographies to watch in 2019?
RH: Definitely China. Firstly, fiscal policy in the second-largest global economy has turned supportive, with a focus on infrastructure investment and tax cuts. Secondly, monetary authorities have just announced further cuts to the reserve requirements, which would improve liquidity conditions. Finally, China is making strides to liberalise its economy. Collectively, these actions should fuel stable and improved growth in the year ahead.
AP: China, India and EMs will perhaps be the markets to be in as soon as the Fed and China start to stimulate.
BK: The possibility of EMs outperforming – given so many years of underperformance – is the thing to watch out for. Can Europe escape stagnation? Can China manage a consumption-led economy?
CH: SA and Turkey unravelling, Chinese stocks, solar energy prices.
BSe: EMs over developed markets.
JW-E: All of them! But I do worry that more structural cracks are appearing in Europe, which could come under real strain if there is a sharper slowdown.
BS: China (as a proxy for most EMs) and the UK.
What are the sectors to watch? Look at cyclicals versus defensive, growth versus value, offshore versus local, industrials versus resources, bonds versus equities, tech, or any other themes that are worth mentioning.
AP: For the first half of 2019, I would be in defensives, government debt and cash. In the second half, emerging market bonds, high yield and commodities (copper and oil).
BS: I have thought for a while that the opportunity lies in emerging markets, cyclicals and value. This was based on the view that as interest rates and the global economy normalised, we would see rotation out of the high growth stocks into value stocks. I still expect this to happen, but it may not happen in a straight line.
CH: There's going to be a huge focus on corporate governance on a global scale. Expect larger discounts applied to companies which have been accused of questionable practices (Johnson & Johnson, Volkwagen, etc). Local consumer stocks should benefit from the fuel price cut and the Monetary Policy Committee staying put. There are a couple of bashed-up global consumer names that could recover – British American Tobacco and AB InBev. Emerging markets in general could markedly outperform developed markets; US dollar to weaken.
BK: SA domestic plays still appeal. On a stable rand and lower inflation, and later, lower interest rates, the lesson of 2018 is that the global plays on the JSE are too few to offer diversification. Private clients should continue to find opportunities offshore.
BSe: Cyclicals over defensive, value over growth, local over offshore. More focus on valuation as growth slows.
JW-E: Financials (especially banks) do seem to be discounting Armageddon, so they should rally if things stabilise.
Where could surprises spring from in 2019, ie asset classes, sectors or geographies that could defy consensus, either on the upside or downside?
JW-E: Europe on the downside (see above). China on the upside – they are loosening policy and although the effect will be lagged and not as impactful as in 2008 or 2016, it should still bear fruit.
AP: I think US Treasuries might rally further than the current market consensus – as inflation will undershoot, given the strong US dollar and falling oil price we saw in 2018.
CH: US dollar to weaken, as the worst-case scenario for global growth fails to transpire. Energy prices to remain low. Chinese growth to surprise on the upside. US state pension funds to come under more strain and may require bailing out to prevent cross defaults.
NU: I can see a scenario where US equities do race up into a blow-off type phase. It isn't a great investment (price story) but speculation could resume, given where interest rates may go. Another possibility is QE4 (quantity easing, round 4) if the US struggles to fund the deficit.
BK: Any market move is, by definition, a surprise. Burnt-out traditional SA-listed property could surprise, given lower RSA bond yields and a modest recovery in the SA economy. A 2% SA growth would surprise and reinforce the SA economy plays, especially small, SA-focused caps on the JSE.
BS: Russia's President Vladimir Putin is unpredictable, and I wouldn't be surprised if he did something alarming.
The bubble appears to have burst in the cryptocurrency market. Is there life in this asset class yet? And could blockchain come of age in 2019?
JW-E: It's a huge scam! There is no intrinsic value in any cryptocurrency. Blockchain is viable, but hard to monetise.
AP: As with all bubbles, one has to pick carefully which one to buy and money can be made, but it will be volatile, and we will not see the previous highs again for a few years.
CH: Nope. It's a technology that does not scale well. Usage is set to increase but not come anywhere close to the hype.
BK: Not as a momentum play. Reality has set in permanently.
BSe: Blockchain seems to still be a long way from universal use, despite the merits of blockchain remaining relatively underappreciated. My crypto views remain unchanged: the utility of blockchain is what's important, not the price of the coin.
BS: I suspect that in time there will be a resurrection in cryptocurrency, but like the internet bubble, I don't think it will happen right away. I think it may only happen once a clear winner in the space has been established and they are regulated and recognised globally. This will take some time.
What's your view on the elections in SA this year? Will it open things up for President Cyril Ramaphosa to make the changes that will please investors and get the economy growing?
CH: Yes. 60%+ for the ANC translates as a mandate for Ramaphosa and frees his hand to implement reform. Eskom retrenchments could then kick off. There will be public-private partnerships, but they will be called something else. An EFF result of about 10% shows its very limited appeal.
BK: Please, a little – especially if Eskom becomes a private-public partnership, slimmed down through asset sales, etc.
JW-E: No strong view but looking at events in Zimbabwe, I am reminded of the (not exact) words of Warren Buffett: "When a good management meets a bad business, it is the reputation of the business that usually remains intact."
BS: Yes, but I expect a bumpy ride through to the elections.
NU: I hope so, but I worry we are too hopeful. The best advantage we have now is that equities are priced at fair value to cheap, if things work out okay.
Last year, the black swan event that we suggested was the Western Cape running out of water. This year's equivalent big worry is of a serious failure at the national electricity utility, Eskom. What are the chances of this happening and what needs to be done to prevent it?
BS: I don't think it's likely, although I am not an engineer. As far as I understand it, what's required is effective maintenance and ensuring stock of good quality coal – which doesn’t seem like a big ask, although it's tough when you have limited access to cash.
CH: There's little option but for mass retrenchments and selling off part of the grid. Let's hope the ANC gets the support required to do it…
BK: The solution for Eskom is obvious. As noted above, political will is what's required.
NU: Government won't allow it to happen, so expect lots of noise, ups and downs and a number of blackouts – but it won't be allowed to fail.
Any other global black swan events you envisage for 2019?
BK: Are black swans not the unknown-unknowns to which we react because we cannot anticipate and prepare for them?
NU: SA – possible Zuma-supporting ANC team and EFF tying up, with the DA then joining the ANC: this would certainly be a black swan event and hence, unlikely! Globally, the creation of a gold-backed alternative reserve currency to the US dollar.
AP: That geopolitics and policy mistakes by regulators turn the current slowdown into a global recession.
BS: Algorithmic funds causing more flash crashes.
BSe: The US gets a new president!
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View, and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek, and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.
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