Madalena Teixeira of ASK Wealth Management warns that interest rates dispersion between Europe, Japan and the US might affect emerging markets and developed economies alike, widening the gap between both blocs.
This year threatens to be challenging as the three major economies are in very different rate cycles, which could have an impact in almost every asset class as well as on Teixeira's fund selection process, warns the senior portfolio manager.
"If central banks from the US, Japan and Europe keep their divergent policies, rate hikes and standstill QT, fixed income assets might suffer an impact as well as FX rates and consequently the other asset classes as prices will be affected by currency depreciation/appreciation.
When you combine expertise with good communication and excel at governance, you become an admirable manager."
"If this divergence persists, the gap between developed and emerging economies will grow, since EM economies will see their currency devaluing while the cost of debt will increase, as recently seen," says Teixeira.
According to the IMF, while the US expansion continues, the forecast remains for a deceleration with the unwinding of fiscal stimulus. Across advanced economies, growth is expected to slow from 2.3% in 2018 to 2 % in 2019 and 1.7% in 2020. This softening growth momentum has provided little lift to inflation. While core inflation is close to target in the US where growth is above trend, it remains significantly below target in the euro area and Japan.
"The outlook for emerging markets and developing economies reflects the continued headwinds from weaker capital flows following higher US policy rates and exchange rate depreciation, even though they have become less extreme. Across emerging economies, some of the pickup in inflation reversed towards the end of 2018," says the IMF.
Teixeira is also concerned about the geopolitical climate. The Fed's economic stance, the looming trade war between Washington and Beijing, the future of the EU and the Brexit outcome are some of the hot topics she is looking at when selecting funds. Nevertheless, her biggest worry is the volatility building up in the market.
"2019 will be at least a tricky year and once again due to the expected volatility. Our focus will be in alternatives, in order to reduce asset correlation. Global macro data results will be decisive over the next few months, and they will surely craft 2019 financial markets path."
To avoid disruptions in the months to come, Teixeira champions diversification as an effective way to reduce volatility while unveils to be paying special attention to alternatives, namely global allocation funds and unconstrained ones.
When it comes to quality, the manager's background and expertise is essential. "It's important to know that the one managing the funds is aware of different business cycles, and knows that markets can turn from time to time. When you combine expertise with good communication and excel at governance, you become an admirable manager," she comments.
QUALITY AND OPEN ARCHITECTURE
As a senior portfolio manager for ASK, Teixeira is responsible for the firm's portfolio investment decisions, which includes both asset allocation and portfolio tailoring activities. ASK, launched in 2008 and with current AUM of €50m, is headquartered in Lisbon, but has also offices in Brazil, Angola and Switzerland - through a partnership with TASK Wealth Management.
Although ASK's portfolios are mainly invested in actively managed funds, it also uses ETFs when it comes to implement an investment idea quickly or when it finds some opportunistic short term view.
As part of the asset allocation team of a global fund house, she explores all asset classes and geographical areas. "We monitor a wide number of funds from different geographies and asset classes. Our selection process is purely based on quality and open architecture.
"In our analysis process we often monitor smaller/niche investment managers with alternative investment solutions, but we also follow the mainstream investment houses, since they usually offer a lot of expertise and new ideas. Finally, we specifically focus on our due diligence process in order to choose those funds that truly comply with our governance policy while making sure they are a perfect match to our clients' portfolios."
Looking ahead, she foresees new asset management firms launching in Portugal as a result of the major trend of mergers and acquisitions that the Portuguese banking sector has gone through over the past few years, as its neighbor country Spain.