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Multi-Asset outlook: fundamentals are healthy but keeping the faith may be tested

Paul O’Connor, head of the Janus Henderson Investors UK based Multi-Asset team, discusses 2019’s potential headwinds and tailwinds and how a multi-asset approach could help to smooth the ride for investors.

What are the key themes likely to shape markets in 2019?

At face value, the global economic outlook for 2019 and beyond still looks fairly market-friendly. Consensus forecasts continue to project an unusually long economic expansion, with few signs of imminent recession, offering continued fundamental support to mature bull markets in risk assets. However, given the unprecedented nature of some key aspects of the current macro environment, and the fact that both policy and political uncertainty look set to be unusually high in 2019, faith in the constructive long-cycle scenario is likely to be frequently tested during the year.

On the monetary policy front, concerns are likely to focus on whether the US Federal Reserve (Fed) can engineer a ‘soft landing’ and how financial markets will adjust to the ending of the decade-long era of global quantitative easing (QE). Away from central banks, the other big policy question overshadowing 2019 is whether global trade tensions will ease before economic confidence is damaged or some sort of financial accident is triggered in the emerging markets. On top of this, the year is likely to be punctuated by a number of political flare-ups, with developments in Italy and the UK looking most likely to generate headlines in the early months of the year.

Chart 1: Rolling annual central bank asset purchases (US$ billions)

Source: Bloomberg, TS Lombard, as at July 2018

Note: Projections after June 2018 US Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ), Bank of England (BoE)

Where do you see the most important opportunities and risks within your asset class?

We see equities offering the highest expected returns in 2019, although they will probably give quite a bumpy ride. We think 2018’s washout in high yield stocks has created some attractive entry points, particularly in the UK. Regionally, one of the big calls for the year will be whether 2018’s US outperformance in the equity and currency markets can continue. We feel that many of the fundamental drivers of these trends are now well priced-in and that the best phase of US outperformance is now behind us. Gauging when to rebuild exposure to emerging markets will be another key decision in 2019. Value is emerging here but a sustained upswing will probably require significant good news from US-China trade talks or the belief that US interest rate expectations are peaking.

How have your experiences in 2018 shifted your approach or outlook for 2019?

We saw 2018 as being a key transition year for financial markets. The big theme here was the ending of QE and an unusually benign era in financial markets and the return to a more complicated and uncertain market environment. We expect that the uncertainty witnessed in 2018 may continue into 2019. If this is the case, lower and more variable returns and greater volatility than experienced during the QE era is likely. While buy-and-hold investing worked well when markets were clearly trending higher, the choppier conditions that we expect for 2019 will demand a greater emphasis on volatility management and asset allocation. In this sort of environment, the inbuilt diversification available from actively managed multi-asset funds should help investors by spreading risk across asset classes, while offering plentiful opportunities.