Coutts, the wealth management firm has put together a report this month that identifies a range of investment opportunities for 2019, despite the current global uncertainties.
The private bank continues to see value in undervalued UK equities this year, according to their latest Investment Outlook – Children of the Revolution. The report also highlights investment opportunities in global healthcare, commercial property and technology with Russia and Gilts also being identified.
Despite the opportunities for investors, the report also recognises that the landscape is complex and uncertain.
Mohammad Syed, Managing Director at Coutts, said “Coutts believes that that world economy is driven by its two major players: the US and China. Investors concerned about slowing economic growth are watching the direction of the US dollar and interest rates, and China’s plans for economic regeneration. In the meantime, a bellicose atmosphere around trade between the two countries is fuelling investor concerns over world trade. What happens next will set the tone for the year ahead.”
Investment opportunities for 2019
With complexity and uncertainty comes opportunity. In this environment asset prices could change rapidly to reflect shifting perceptions of risk in the global economy. Investors are likely to see more variations in returns between sectors and regions, and even within those areas. In response, Coutts is readying itself to act when the opportunities present themselves.
Coutts positive view on Russia performed well in 2018 while maintaining a relatively low allocation to the broad emerging markets, which struggled against dollar strength and trade jitters this year. The year ahead will be about finding the opportunities like this within sectors rather than taking broader sectoral positions. But the market backdrop is febrile – Coutts’ view on Russia remains positive, but portfolio managers are watching oil prices where a change in direction could see a change position.
Health care has been another positive contributor in 2018 that will continue in to 2019. The long-term drivers remain in place and – as discussed in the full report – there is substantial innovation coming that will drive returns for investors.
Investing in Japan didn’t work last year – the MSCI Japan Index returned 15.2% in the 12 months to the end of November 2018 in yen terms – but Coutts continues to have confidence in the long-term outlook. Japanese companies are very profitable, earnings growth is positive and corporate reform is advancing, albeit at a gradual pace. Japanese equities are also cheap compared to other developed markets.
While potential long-term returns are still low, Coutts see two advantages to holding gilts for the start of 2019. Firstly, they are a hedge against certain unpredictable events, for example an Italian budget crisis or a difficult Brexit. Additionally, they provide liquidity in portfolios to allow Portfolio Managers to move quickly to take advantage of opportunities as they become apparent.
Key Challenges for 2019
US and China tug of war
An escalation of trade conflict between the US and China could dent global growth in 2019 and 2020. Indeed a trade slowdown combined with tariffs could mean less investment from corporates and rising inflation on imported goods, which would hurt consumers. This could create headwinds for equity markets, in particular those with high exposure to global growth (so called cyclical sectors) and emerging countries. Coutts would expect European stocks, which are heavily exposed to emerging markets to suffer in this scenario, which regions like Japan that have a stronger internal market could prove more resilient.
Emerging markets: China and the dollar
Emerging markets had a difficult years in 2018. The slowdown in China hurt sentiment and a higher US interest rates and a stronger dollar were a drag on emerging countries that rely extensively on financing from developed countries. Should trade tensions fade, the environment could become more supportive of emerging markets, which now look more attractive from a valuation standpoint.
A spectre stalking the Eurozone
It is impossible to completely rule out political risk in Europe and 2018 was a good reminder why. Coutts is not expecting the European parliament election in May 2019 to be disruptive but is expecting long lasting issues to continue and a political risk premium to remain attractive, but as Europe is quite sensitive to the business cycle it believes that there will only be a sustained rebound if global economic activity picks up.
Brexit – towards the end of uncertainty
As the March deadline approaches, the details of the exit framework will start to emerge. Assuming a Brexit deal is agreed, some uncertainty will be lifted and rising wage growth and improving business investment should lead to a slight rebound in the UK economy in 2019. This would naturally benefit domestically orientated companies, but also encourage global investors to reconsider KUK equities. Valuations are attractive and Coutts thinks that UK equities have the potential to do well in the scenario of a slowing but resilient economy, partly because the market is composed of a relatively high proportion of the defensive companies. The biggest risk to this outcome is a rapidly rising pound that would hurt the earnings of UK companies that derive earnings from overseas.
Mohammad Syed continued; “Looking at the year ahead we see a world in flux. New forces are rising to challenge the economic trends of the previous decade as people process the consequences of technological innovation and global economic deregulation. In the meantime, the divergence of global growth and monetary policy between the US and all other nations that shaped 2018 is a naturally unstable situation that can’t endure for long.
“The 16th September 2018 marked ten years since the collapse of Lehman Brothers, the moment that saw the high water mark of the global financial crisis. A decade later, the global economy has been transformed. Anyone waiting for the world to go back to how it was before the crisis will be disappointed – that world has gone for good.
“The macros economic environment is highly interdependent and keeps changing rapidly. In our 2019 outlook we consider the forces that are driving this change. These are the forces that will dominate the lives of the next generation, the Children of the Revolution who will take up the reins of the world in the coming decades.”
The report ‘Coutts Investment Outlook 2019 – Children of the Revolution’ also carries chapters on thought leadership around themes including healthcare, investing responsibly and the new economy – the end of the middleman.