Fund managers look to defensive assets for 2019

Fund managers look to defensive assets for 2019

Economic data and market sentiment are expected to push investors towards defensive investments in 2019, according to Ian Heslop, head of global equities at Merian Global Investors.

Mr Heslop, who jointly runs the £1bn Merian Global Equity fund and the £2bn Merian North American Equity fund, said it was "hard to be positive" on the global equity markets in 2019, due to weaker economic data happening at the same time as monetary policy tightens.

In the decade following the financial crisis central banks engaged in the policy of quantitative easing and low interest rates to stimulate economic demand. But this is gradually coming to an end.

The US Federal Reserve is now putting interest rates up, while the European Central Bank (ECB) last week announced it would halt its quantitative easing programme - at a time when Germany, the largest economy in the bloc, has negative GDP growth.

The effect of higher interest rates and less quantitative easing is less liquidity in the financial system, leaving less capital to be deployed to buy financial assets, and less cash in the system to generate economic demand.

Mr Heslop said: "It is logical that if QE pushed asset prices upwards, then the reversal of QE could push them downwards."

The role of quantitative easing in boosting share prices was described by the fund manager Neil Woodford. He said: "When you look at the share prices of many companies, at how far they have gone up, and then you look at how much earnings have risen, earnings have not gone up by as much, that gap that is caused by quantitative easing."

Mr Heslop said earnings growth data in many economies had been strong, but in the US this must be seen in the context of the "sugar rush" of tax cuts announced earlier this year, which would wear off in 2019.

Mr Heslop said he has been moving the funds he manages into more defensive asset classes for some time. He added companies that have low levels of debt are likely to be safer options at a time when the cost of debt is rising.

Anthony Rayner, who jointly runs £900m of assets across four multi-asset funds at Miton Group, said a major change in markets was that investors were persistently worried about bad news.

He said this was to the extent that when one set of worries, such as the impact of a higher oil price, dissipates, the market finds something else to worry about, so negative sentiment persists.

He said: "It’s not these concerns per se, but rather that markets are just focusing on risk more. Maybe it’s the slow grind of quantitative tightening in the background, in crude terms, just acting in reverse to QE. This is leading to the 'survival of the fittest', but what has this meant for asset classes?

"With the benefit of hindsight, despite a broadly positive macro environment since the beginning of February this year, it’s been a fairly textbook response to risk-off. Within equities, defensives have outperformed cyclicals and US Treasuries have outperformed US high yield corporate bonds; in commodities, gold has answered its safe-haven calling, and in currencies the traditional safe havens of the Japanese yen, Swiss franc and the US dollar have outperformed most other major currencies.