Global Slowdown Biggest Risk to Investment Returns

Nevermind Brexit and Trump, slowing global economic growth is the biggest cloud on the horizon for investors says BMO's Anthony Willis

Emma Wall 19 February, 2019 | 9:29AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by BMO's Anthony Willis.

Hi.

Anthony Willis: Hi.

Wall: So, what is concerning you the most at the moment?

Willis: At the moment, I think, it's really global growth that's giving us the most concerns. We've gone into this year really with this sort of data showing that things are starting to slow down, particularly in Europe, but elsewhere as well, Asian markets, particularly China. We've seen Chinese growth starting to roll over. The authorities there are doing something about it, but they probably need to do a lot more.

Elsewhere, you look at the U.S., it's really been very strong last year. But was that just because of the tax cut? This year we are starting to see the data roll over. So, global growth is our biggest concern and obviously, that feeds into corporate profits.

Wall: And what then, because you are lucky enough to have the world as your oyster in terms of where you can invest across asset classes, across the globe. What are you avoiding in order not to be hit by that slowing global growth?

Willis: Well, I think, we are just being conscious of certain areas where growth has really slowed more aggressively. So, Europe is the best example of that. You've still got a central bank which is relatively loose. But compared to what the Fed is doing and maybe what the Bank of England is doing, maybe not a little bit more policy constraint than we're seeing elsewhere. So, for the moment, we think Europe is probably less attractive. On top of that, ignore the economics, you've still got political risks as well. So, we don't particularly like Europe.

The other place, of course, is the U.K. at the moment. But that's more of a political risk concern than the growth concern. We think if we do get some certainty over the Brexit vote, we will then see some sort of rebound in the U.K. growth. It feels like we've been sort of a bit pushed down by a spring at the moment. But if we get some certainty on Brexit, that's a positive thing. So, we are avoiding or certainly underweight the U.K. and Europe at the moment.

Looking a bit further afield, we still think there's opportunities in Asia and the emerging markets and that's our preferred areas. The U.S., we've really been underweight for a little while just thinking it's too expensive. Unfortunately, it's been too expensive for quite a long time. So, we haven't really – that hasn't played out too well for us really relative to some other parts of the world. Thankfully, it's been offset by decent growth, particularly in the second half of last year in the emerging markets.

Wall: And what about asset classes? Does either equities or bonds lend themselves better to either avoiding that growth risk or indeed taking advantage where there is it in emerging markets, for example?

Willis: Well, I think, emerging markets is a good place to start because emerging market debt had a really interesting year last year, a year of two halves, all about the dollar really. So, the first half of the year dollar rising, emerging market debt had a really tough time. Second half of the year, really with the dollar easing off, emerging market debt did pretty well. And so, we've actually had a fair old bit in emerging market debt in the second half of last year.

As we've gone into this year, we've actually taken some profits there just because we think it's run very far. The dollar rally may well have paused, but there's a fair chance it will come back just because the U.S. is better placed than a lot of other places in the world for the economic growth to continue. So, we do feel that the dollar may actually have a little bit more strength than people think. Everyone has been talking about the end of the dollar rally, but other central banks will ease, too. Therefore, just because the Fed has eased, it doesn't mean the others will do the same.

Wall: And what about equity opportunities? You've mentioned debt there.

Willis: Yeah. So, equities, we are actually now underweight equities, which is the first time we've been underweight equities probably for, well, at least two years I would say. Again, it's those global growth concerns. It feels like earnings growth has been so strong over the last two years; it feels like that's coming off now. And we are actually a little bit more interested in fixed income on the opposite side of that.

But we are still marginally underweight fixed income as well. So, there's really a gap at the moment and that's where absolute return and actually a little bit of cash comes into play. So, our overall outlook is probably more bearish than we've been for a while, but we are not actually taking that much money out yet, but we do see some dark clouds on the horizon.

Wall: Anthony, thank you very much.

Willis: 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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Emma Wall  is former Senior International Editor for Morningstar