Outside the United States, interest rates should remain low. The European Central Bank is unlikely to raise rates before summer 2020. A “no-deal” disaster aside, forecasts are for the Bank of England to hike only once in the next 12 months.
In other words, investors will still have to hunt diligently for yield, preferably in a sustainable way. We wouldn’t recommend buying yield for yield’s sake. Investors must be confident in a company’s management and strength of its business model before they invest in its debt. This includes the ability to service its debt under a range of possible outcomes.
Fine-Tuning Portfolios
As a result of our discussions, we have made modest changes to our asset allocation. Our risk level is largely unchanged, although it has been spread more broadly across global equities. We continue to like emerging markets, such as China, which made a strong start to 2019. We are also examining our positions in high-quality credit, partly for diversification and partly for carry purposes.
Looking Beyond 2020
Given high levels of global debt, we are still analyzing the possibility of recession in coming years. China remains a concern. The outcome of the U.S. presidential election will be a major factor. For one thing, the result will dictate how the strategic rivalry between the United States and China evolves. Regulatory oversight will also become increasingly prevalent, notably towards the technology sector. Government policies point to increased intervention and further regulation. This will have direct implications for economics and financial markets. It will also put pressure on companies at a time when they are dealing with disruptive new competitors.
Against this backdrop, we are maintaining moderate levels of risk. We expect to trade tactically through 2019, as the various markets price in more good and bad news. An understanding of valuation signals and investor positioning will therefore be just as important as corporate, economic and political influences in determining how to make money for our clients.
Andrew Milligan is head of global strategy at Aberdeen Standard Investments.