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By Emma Wall| 12-17-2018 9:00 AM

State Street: Be Ready to Invest in 2019

State Street Global Advisors' Kevin Anderson says 2019 will be volatile - but there will also be opportunities for investors who are ready to pivot

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Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by State Street Global Advisors' Kevin Anderson to give his outlook for 2019.

Hi, Kevin.

Kevin Anderson: Hello.

Wall: So, we are here today to talk about how 2018 has rolled out and what investors can expect from 2019, with one particular focus and that's the trade war. It has particularly affected people here in Hong Kong, in Asia, dominated the headlines in 2018. Can we expect it to do the same in 2019?

Anderson: As we walk into 2019, we actually have a moderate overweight to U.S. equities. We are cautious on emerging markets but reflect on the fact that valuations are actually pretty attractive. So, the trade war is certainly in the minds of investors, certainly in the minds of emerging market investors, but we don't think that that should put investors off, still seeking the strong fundamentals in the U.S. market.

Wall: And of course, you mentioned there that valuations do look quite attractive in emerging markets because fear has sort of stoked a lot of pullback, hasn't it, and that's created opportunities?

Anderson: Well, there's been a significant negative sentiment emerged in emerging markets over the course of 2018. We should reflect on the fact that emerging market valuations are actually not too far away from long-term averages in absolute terms. Relatively though, compared to developed markets, they are looking attractive. China, in particular, for a long-term investor who is prepared to withstand some more volatility, we think these are attractive entry points, especially into sectors like consumer discretionary.

Wall: Should we expect some volatility though? Because although they have pressed pause on the sort of trade tariff rhetoric, it is only pause, it's not an end to it, is it?

Anderson: We certainly haven't seen the end and there's a self-imposed deadline, if you will, for resolution, which is fast-approaching. If the full set of tariffs were to be imposed by the U.S., we could see 2% come off GDP in the U.S. and China, for example, and that would be quite significant.

Our core view is that cooler heads will prevail, and we are seeing some signs of that with the changes in auto tariffs, resumption of purchase of soybeans, for example, from China. But there's still a lot to negotiate for sure. And so, volatility is likely to be a part of our landscape until we see resolution here one way or the other.

Wall: Now, some of your peers, to pick up on your point about that potential hit to GDP, are predicting a U.S. recession for 2019. Presumably with your overweight to U.S. equities, you are a bit more positive on that market?

Anderson: Well, our view would be, at the moment, that it really isn't over until it's over. And there may well be time for reflection as we get through mid-2019 that there's opportunity to pivot from the U.S. where earnings are still strong, where fundamentals are strong to markets that have been somewhat more beaten up and beset by political considerations.

I'm not really just talking about U.S.-China here; I'm thinking about Europe in particular, which is also looking very cheap, but beset by a number of really significant political challenges and ultimately, those challenges could dissipate, and we could see opportunities. So, be ready to pivot.

Wall: Kevin, thank you very much.

Anderson: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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