Adrian Banner, Intech’s Chief Executive Officer and Chief Investment Officer, believes that heightened volatility will shape markets in 2019 and discusses where opportunities may arise in this environment.
What are the key themes likely to shape markets in 2019?
Overall, we expect heightened volatility in equity markets to be a key theme in 2019 amidst a backdrop of several macroeconomic and geopolitical concerns. Fuelled by continuing economic growth, the ageing bull market in the US may continue for some time, adding to the already extended valuations of US stocks. As rates and inflation are expected to rise, any financial market excesses are likely to signal a risk of recession. US tariffs against many of its largest trading partners will continue to impact US corporate earnings and could have contagion effects around the world. In addition, China’s economic growth rate is slowing at a sharp pace amid the intense tariff dispute and alarming off-balance-sheet borrowings by local governments, issues that may contribute to global market volatility in 2019.
Where do you see the most important opportunities and risks within your asset class?
US equity markets appear to be overly concentrated, given the extreme performance of some large-cap growth stocks. We are also in the midst of a prolonged period of unusually low relative dispersion across many equity markets, as seen in Intech’s Equity Market Stress Monitor, suggesting that there is strain in many equity markets globally and an increased potential for heightened volatility as this measure moves to more typical levels. That said; we believe that investors need to continue investing in stocks to generate enough growth to stay ahead of inflation. Opportunities exist within defensive equity investing and absolute return strategies, which should provide investors with the best chances to preserve capital and grow assets in an environment of rising volatility. Additionally, we expect that investors will seek growth outside of the US given the relative underperformance of non-US equity indexes in 2018.
How have your experiences in 2018 shifted your approach or outlook for 2019?
By many measures, uncertainty abounds in equity markets, and investors need a mechanism for dealing with the potential changes in volatility. 2018 demonstrated that heightened volatility can emerge sporadically, as seen in early February and most of October, and as volatility and correlation of stocks changes so do the alpha and diversification benefits of a portfolio.
At Intech, we base our decision model on observations, not expectations. Our model inputs are stock price volatility and correlations and we don’t rely on subjective forecasts of markets, factors or company performance. If 2019 does bring the heightened volatility many predict, we expect our managed volatility portfolios to adapt by migrating to a more defensive posture. Conversely, if we experience another year of suppressed equity risk, we expect the portfolios to migrate to a more market-like stance.
The Intech Equity Market Stress Monitor is a collection of five metrics Intech believe are reliable indicators of equity market stress, based on the company’s 30-year history of studying volatility.
Which themes have the potential to redirect markets in 2019? Download our Infographic to find out
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
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