BY MIKE WILLANS, HEAD OF EQUITIES AND BIMAL PATEL, FUND MANAGER
2018 was an extraordinary year of ups and downs for all assets classes and thanks to a combination of geopolitical, macroeconomic and monetary policy shifts, global equities went wild in Q4. It turned out to be the worst quarterly stock market sell-off since the financial crisis and was especially volatile in December in reaction to the US government shutdown and the US Federal Reserve’s interest rate ambitions. More disappointing PMI data, particularly for European Composite and Manufacturing, showed how much global growth is decelerating, while the now longest-ever US government shutdown in history was beginning to weigh down GDP and add to the already rising negative sentiment.
Changing risk climate
We expect similar market swings to continue in the first half of 2019 or as long as the Sino-US trade tensions and domestic policy issues in different countries remain unresolved. We are closely monitoring how these uncertainties affect company earnings, especially considering how much the G10 central bank tightening has advanced and led to net asset purchases turning negative. Further interest rate hikes in the US had been priced out of the market by the start of 2019 and previous expectations for the Fed to raise them three to four times this year have waned. Considering the implications, we are well-positioned moving into 2019 and are now, for example, 4% underweight financials, which typically perform poorly when yield curves flatten or invert.
While equities in the UK continue to be lowly valued and aggressively under-owned globally, we believe the pound is close to bottoming out. In the Eurozone, excessive debt and political uncertainty in Italy remain a significant concern but also alarming by the end of 2018 was Germany’s deteriorating industrial production (due to trade tariffs and new auto emissions standards that caused backlogs and delays). Considering how important the auto industry is to Germany it could be headed for recession. This disruption is worrying for the European Central Bank (ECB) since Germany’s industrials account for about one-third of all Eurozone economic output.
Timing is key
Given the global slowdown and increased geopolitical uncertainties we remain generally defensive. Defensive plays in our portfolio continue to be predominantly in US staples and healthcare companies with telling catalysts; for example, Novo Nordisk, the pharmaceutical company well-known for producing the world’s top-selling treatments for diabetes, which as with obesity is on the rise globally. Other innovative healthcare companies developing AI and robotic technologies for surgical operations and diagnostics remain on our radar screen but valuations for some are still too high and we believe some of these ‘good stories’ could potentially de-rate. We expect P/E multiples of many US names to go down further during this late stage of the cycle and although equities everywhere are becoming ‘cheap’ it does not necessarily mean they are a good buy; some could remain ‘cheap’ for years.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments can fluctuate. Currency fluctuations can also affect performance.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s).
Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
CLI01351 Expiry 03/31/19