Investment Firm’s 2019 Outlook Gives Institutional Investors a Forward-Looking Picture of Capital Markets, from Credit to Emerging Markets
BOSTON (December 12, 2018) –Central bank tightening, a slowdown in Chinese economic growth, and tariff skirmishes back-footed investors this year, curbing returns for equities, bonds, and real assets. However, looking ahead to next year, developed market equities could provide institutional investors with mid- to high-single digit total returns, supported by stable dividend yields and expectations of respectable, but slowing, earnings growth, according to a 2019 Outlook report from global investment firm Cambridge Associates.
“A key question for 2019 is whether this recent volatility marks an intermission of the nearly decade-long bull market or a turning point,” said Managing Director Wade O’Brien of Cambridge Associates. “We think it’s the former, but the second act may be far shorter than the first.”
Added Celia Dallas, Chief Investment Strategist at Cambridge Associates, “Our central view is that the economic expansion will continue into 2019, but that volatility will remain elevated. Investors may see more risk and less return than in recent years.”
With bonds suffering an uncommon down year in 2018, contrarian investors may expect a rebound. But Sean McLaughlin, Cambridge Associates’ Head of Capital Markets Research, cautions that 2019 could prove to be a second difficult year. “Treasury issuance is ballooning because of the US fiscal deficit, and yet central bank balance sheets are shrinking fast. This previous tailwind is fast turning into a headwind. And non-US buyers are on strike because of the high costs they face hedging currency risk today.”
Among the other 2019 outlook highlights from Cambridge Associates:
- While emerging markets aren’t set for a 1998-style credit crisis, the macro backdrop isn’t strong, with economic growth continuing to slow as China restrains the buildup of debt and tariffs begin to bite. That said, investors who can stomach the volatility and drama in this sector may ultimately do well by overweighting emerging (as well as non-U.S. developed) markets and underweighting the expensive U.S. market. Also, rising yields for emerging market bonds boost their appeal for skilled credit pickers.
- Some real asset markets are likely to deliver less-than-thrilling returns next year, even amid strong fundamentals. The muted view reflects how expensive some markets including real estate are, Cambridge says. Within the real asset arena, investors may do best to favor lower-risk, income-producing strategies when allocating additional capital.
- The environment for commodities has been challenging – to the point that some question whether they even make sense within many portfolios. But poor performance is precisely why commodities probably shouldn’t be shunned, Cambridge says. Lackluster returns mean valuations are fair.
- When it comes to credit, for 2019 Cambridge favors structured credit – including CLO debt and equity – over more liquid markets, and it prefers floating rate to fixed rate exposures. Further, the firm is more enthusiastic about private credit than public opportunities – despite the private market’s $300 billion pile of dry powder still to be invested. That means investors must be selective, especially when it comes to popular strategies like direct lending.
- Which market category might have the most optionality, according to the report? UK equities, and especially domestic-oriented mid-cap stocks, are the dark horse asset class, notes Cambridge. If the UK can somehow shepherd the Brexit compromise with the E.U. through Parliament, UK assets could be off to the races, particularly more domestic-oriented mid-cap stocks, which would face fewer headwinds than large caps from the expected sterling rally associated with an orderly Brexit outcome.
“As central banks continue to roll back stimulus and the clock ticks ever later on this expansion cycle, the focus in 2019 is likely to shift to the timing of the next recession and, especially when it comes to credit, the related default cycle. The better news is that improved valuations on many credit instruments offer a bigger cushion than was the case 12 months ago,” said O’Brien.
While credit-market opportunities and solid equity fundamentals beckon, Cambridge believes that the U.S. is in later stages of its economic cycle and investor prudence is critical. “Even though the market may yet reach new highs over the coming year,” Dallas noted, “it is never too early to develop a plan for navigating the next broad-based bear market.”
About Cambridge Associates
Cambridge Associates is a leading global investment firm. We aim to help endowments & foundations, pension plans, and private clients implement and manage custom investment portfolios that generate outperformance so they can maximize their impact on the world. Working alongside its early clients, among them leading university endowments, the firm pioneered the strategy of high-equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for institutional investors. Cambridge Associates delivers a range of services, including outsourced CIO, non-discretionary portfolio management, and investment advisory services.
Cambridge Associates maintains offices in Boston; Arlington, VA; Beijing; Dallas; London; Menlo Park, CA; New York; San Francisco; Singapore; and Sydney. Cambridge Associates consists of five global investment affiliates that are all under common ownership and control. For more information, please visit www.cambridgeassociates.com.