global perspectives

investing in a changing world.

investing in a changing world.
Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist
Charles St-Arnaud - Senior Investment Strategist

Charles St-Arnaud

Senior Investment Strategist

Our central scenario of a “No Recession Yet Tricky” year is likely to deliver positive macro support for risky assets, but we are also likely to see more volatility along the way.

We believe the scope for policy mistakes will be elevated next year as the monetary policy environment continues to shift, and both geo-political and geo-economic tensions remain high. Consequently, we have identified a number of key areas of focus for 2019.


Emerging markets

We expect emerging market assets to rebound, especially equities, given the likelihood of a slowdown in US economic growth, the depreciation of the US dollar, and the ongoing policy stimulus in China. This could be an opportune moment to consider a structural allocation to emerging markets using a multi-asset framework.

However, we are also mindful of increased volatility in local EM currencies caused by policy makers’ tendency to use domestic currency as a policy tool to protect foreign currency reserves. This is disrupting the dynamics across EM sub-asset classes. Historical performance patterns of hard, local currency fixed income and equities have started to diverge, which is why we believe a multi-asset approach is the more optimal way to harness the structural opportunities in EM.


Investing for a volatile environment

Explicit downside protection, and a deeper focus on convexity, could be a useful tool for harnessing the upside of a more volatile environment, while also controlling downside risk. Convertible bonds, for example, combine the characteristics of a corporate bond with the option to convert that bond into shares. This means they can offer an ‘asymmetric’ return profile because they are designed to capture upside potential similar to equities, but limit downside risk through the bond component. By finding convertible bonds with the most attractive asymmetric characteristics (convexity), we believe it is possible to maximize risk-adjusted returns in a “No Recession, Yet Tricky” environment. This is particularly relevant in the context of changing equity and bond correlations.


Fixed income

In fixed income, the focus on quality remains important in the context of rising leverage and fractured liquidity. We continue to favour the BBB-BB segment of credit markets both in the US and Europe, which we believe offers a better balance between duration and credit risk. We believe the high yield segment faces a tricky challenge in 2019 given the continued rise in leverage in the corporate sector.


Uncorrelated strategies

Furthermore, the relevance of uncorrelated strategies is likely to increase as the global business cycle becomes more mature. This is especially pertinent where those strategies are designed to benefit from ‘alternative’ sources of information and actively avoid overcrowding.


The Sustainability Revolution

We believe sustainability will continue to drive risk and opportunity in 2019 and beyond. We are currently witnessing a new economic revolution, which will impact every region, every sector, every company and every asset class. This ‘Sustainability Revolution’ is driven by several structural mega trends, notably demographics, climate change, scarcity of natural resources, inequality and digitalization of our economies. We believe this will start to impact monetary policy going forward as central banks pass the point of peak independence as governments come under increasing pressure to address inequality in particular.

important information.

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