By David Bailin
Chief Investment Officer
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With no global recession imminent, we continue to urge putting excess cash to work and making portfolios more resilient
2017 was a year of market euphoria. 2018 was a reset of market valuations relative to global growth concerns and Fed policy. The sky was falling on our heads in December 2018 – “The worst December since 1931” – and the sun has never been brighter in January 2019 – “The best January since 1987”. Perhaps our best advice is to stop watching the news! It is often useless information that drives bad investment behaviors. Fund flow data confirm that advised, retail clients all over the world sell when sentiment is bad and buy when enthusiasm is high.” Our analysis highlights that advisor sentiment is a terrific contra-indicator.
In 2019, our strongest view – the one we expressed in our Outlook 2019 – is that global growth is slowing, but that there is no imminent global recession. We recommend that clients stay invested and add to “Core” portfolios. We expect 2.5% growth in the US, 6% in China and 4.5% in the emerging markets. That’s slower growth than in 2018. Given that the Fed has raised rates nine times since 2015 and there is no new tax stimulus in the US, this makes sense. We do see China taking steps to stimulate its economy in a counter-cyclical way, however, and that is incremental good news.
Although the Federal Reserve has reversed course dramatically over the past month, from hawk to dove, it is the actual economic data that determines outcomes. With employment very high in the US, UK and Germany, there is simply not that much more fuel for above-trend growth across the developed world. The recent US government shutdown and “trade wars” have dampened corporate sentiment and investment, but only modestly so far. In fact, this past Friday, we saw that US employment remained strong in the face of the shutdown. Earnings growth has also slowed, in part due to lower than expected oil prices which have dampened income in energy and related industries. All that said, our February 2019 message calls for slower growth to year-end and not recession – a positive environment for moderate equity appreciation, particularly for emerging markets that are sensitive to US rate and exchange rate pressure.
This past week, Citi Private Bank’s Global Investment Committee (GIC) met and we tilted discretionary portfolios more toward Asian equities and emerging market (EM) debt where we see the potential for significant value ahead. We still see the ability to make attractive returns on “excess cash” by gaining exposure to short-term US investment grade credit. We put our own tactical cash fully to work. What we do not recommend is market timing. In fact, when we look back in a few years, those who sold in 2018 will have damaged their portfolios and return profile. Remaining disciplined in the face of volatility and paying close attention to the signal (the “data”) rather than the noise (the “daily news”) is wisest. This is a time when you can safeguard assets by making portfolios more diversified and resilient, while taking advantage of market dislocations.
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