Defensive positioning critical as trade tensions persist

27/11/2018

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​Consumer and business confidence could create opportunity in 2019, but US equity and bond Portfolio Manager Marc Pinto views trade policy as the single biggest threat to both. Here, he highlights the importance of defensive positioning until a resolution is reached.


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

A healthy US economy and improving consumer and business confidence should support US equity market strength in 2019. We expect the general confidence among chief executive officers (CEOs) and their increased certainty in the tax regime to result in continued business investment and merger and acquisition activity. Although the immediate benefits of tax reform are behind us, the value of investing for growth is yet to be fully realised. The challenge now, however, is that companies are weighing those benefits against other concerns, including trade policy. While we are optimistic for a positive resolution, we are mindful that ongoing trade disputes and the eventual policy outcome could have a significant impact on US large-cap equities, consumer and business confidence, and the global economy as a whole.


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

Given economic strength, tight labour markets and modest wage growth, we expect the consumer to continue to spend in 2019. We are seeking to capitalise on robust global travel trends and the desire for experiential moments. The secular shift toward greater connectivity and the ‘Internet of Things’ should also create opportunity, particularly for semiconductor and semiconductor equipment manufacturers.

Additionally, we remain focused on identifying companies utilising disruptive forces to improve business models and increase margins. Traditional industrials and transportation stocks should continue to benefit as they implement technological enhancements to create growth and generate efficiencies. However, disruptive forces also pose risk. We are mindful that healthcare and financial services are likely the next big sectors ripe for disruption, and companies’ ability to combat cyberattacks is of growing concern. Still, we view trade policy as the single biggest threat to many of the aforementioned trends and the multinational companies we own. Onerous tariffs would be inflationary for the US, and rising import costs could cut into profit margins, curbing US exporters’ ability to compete in global markets.


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

Escalating trade tensions and the global response to US tariffs have made us mindful of what is to come in 2019. Without a burdensome trade resolution, confidence will likely remain high, inflation contained and the interest rate market benign, which would provide a positive backdrop for equities. But the US Federal Reserve itself is a risk and we are monitoring its trajectory in the event the central bank moves more aggressively than warranted and stalls the US economy. Given the uncertainties on the horizon, we are positioned more defensively as we head into 2019 than we were in 2018. Prudent position sizing and the discipline to take profits in more economically sensitive names will be an important part of our approach. We will continuously monitor our portfolio exposures, particularly in the industrials sector, for companies subject to trade risk. Should conditions deteriorate, we would look to further reduce our industrials exposure, while increasing consideration for more defensive-viewed consumer staples companies with strong fundamentals.



Which themes have the potential to redirect markets in 2019? Download our Infographic to find out




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