James de Bunsen, Portfolio Manager on Janus Henderson Investors’ UK-based Multi-Asset Team, discusses their flexible mandate that provides broad diversification and the ability to dial risk both up and down in more volatile markets.
What are the key themes likely to shape markets in 2019?
The rise of protectionism and populism is likely to continue to dominate headlines but we expect that the path of interest rates and the reversal of quantitative easing (QE) to have the biggest bearing on markets. For stocks to keep moving higher, company earnings will have to be very strong to offset higher discount rates and the removal of liquidity under quantitative tightening (QT). For bonds, rising interest rates leading to falling prices and inflation is offsetting much of the real return on offer. The best hope for an increase in demand for government bonds would be a growth scare (concerns for a weakening economy leading to perceived safe-haven buying) but this does not look like a story for 2019.
The trajectory of the US dollar will also be key to determining growth, sentiment and asset prices. A strong dollar is tightening financial conditions, particularly in emerging markets, and sucking liquidity out of the market. If the greenback were to weaken, this would give US dollar borrowers some respite and offset some of the impact of rising rates and QT. This could happen if interest rates start to normalise in Europe, and markets will begin looking forward to that event from early next year.
Where do you see the most important opportunities and risks within your asset class?
Luckily, we have the flexibility within our mandates to navigate changing market backdrops. This extends beyond the traditional allocations to equities and bonds into alternative asset classes and strategies. Bonds have been a great diversifier for equities over the past several decades, almost always riding to the rescue when equity markets have suffered severe corrections. This relationship looks less reliable given that yields remain very low by historical standards, and interest rates look set to rise globally.
We think it makes sense to be proactive in adding risk if assets with solid fundamentals get caught up in indiscriminate selling and to diversify into less correlated strategies. Our multi-asset absolute return strategy currently has a very low exposure to equities by historical standards and very few bonds. However, we are looking to add to the latter as yields reach a level that better reflects what appears to be a decent, but decelerating, growth environment. In terms of uncorrelated strategies, we have a high historical weighting to absolute return, relative value and hedge fund strategies that have the potential to perform well in higher volatility scenarios or market rotations.
How have your experiences in 2018 shifted your approach or outlook for 2019?
After 2017’s incredibly serene market rally, 2018 has reminded investors that markets do not go up in a straight line. It also reminded balanced investors that bonds can fall at the same time as equities. Correlations change over time and they can spike higher in times of market stress. We continually ask ourselves whether what we own is valued at a level that, we believe, provides some margin of safety and whether we have a genuine spread of risk across asset classes. A truly robust portfolio, with broad diversification and the flexibility to dial risk both up and down, should have the potential to deliver attractive risk-adjusted returns in today’s more volatile world.
Which themes have the potential to redirect markets in 2019? Download our Infographic to find out
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