As we enter the final couple of months of what has been a volatile year for markets, the below investors share what is frightening them most this Halloween.
Dollar headwinds – Arif Husain, portfolio manager of the T. Rowe Price Dynamic Global Bond Fund
I am negative on the US dollar at present, on the belief it faces some major headwinds. Right now, we are probably at peak US growth relative to the rest of the world and the gap is going to narrow. While the midterm elections probably will not have much immediate impact, it could provide a window to the presidential election in two years. Should we get a sense the ‘Trump premium’ may disappear, it will be negative for the dollar.
Finally, the US has a huge budget deficit and it is going to grow – which will also be negative for the dollar. However, if the dollar remains strong, it will be difficult for emerging market currencies to perform and therefore difficult for emerging equities and debt to perform.
Yield chase – Jacob Mitchell, CIO of Antipodes Partners
The extreme thirst for yield has pushed the US high yield corporate debt cycle into uncharted territory, with the stock of debt outstanding and the average leverage ratio high relative to the current ‘goldilocks’ combination of low base rates, tight credit spreads and high profit margins. The cycle is approaching the shakeout phase.
We have short positions in equities benefitting from the high yield debt boom – including over-hyped thematic ‘disruptors’, the low-volatility bond proxies favoured by passive strategies, as well as companies that have applied extreme leverage to fund M&A and buybacks.
Climate change – Thomas Sørensen and Henning Padberg, portfolio managers of the Nordea 1 – Global Climate and Environment Equity Fund
On a global scale, 2018 is shaping up to be the fourth-hottest year on record. We cannot consider this just a hot year. This is a trend. The planet is getting hotter and will become even hotter in years to come. This will not only cause problems relating to higher temperatures but cause other extreme weather-related events. Scientists are even predicting winters will also be more severe, so it is not just about warming, but climate change.
Encouragingly, we are seeing a growing willingness across every element of society to contribute proactively to a more efficient and sustainable world – with corporates at the forefront of this change. The economic incentive, where it makes economic sense for both consumers and corporates to invest in climate solutions, has clearly reached an inflection point. Companies understand improving sustainability is vital to remaining competitive in today’s world.
Inflation pressures – Jeremy Lang, partner and co-founder of Ardevora Asset Management
A livelier US consumer and near full employment should put upward pressure on wages. Once wage pressure gets entrenched, inflation usually follows. We have not seen inflation for quite a while and we have not seen accelerating inflation for a long time.
There have been price jumps since 2009, but this time it feels different. We look at a lot of stocks and have noticed more excuses from managers about cost pressures in more places than before. There seems to be a convergence of previously isolated pockets of cost pressure. Businesses used to be able to navigate around narrow sources of cost pressure but now there is more layering, or compounding of pressure. The signs are still tentative, but we have noticed more businesses stutter on profit margins – businesses that previously found it easy to push margins up by holding prices and cutting costs.
Looming recession – Brad Tank, CIO and global head of fixed income at Neuberger Berman
As the current economic expansion in the US extends into its tenth year, interest in pinpointing its end date continues to grow. Though the timing of the cycle’s turn is interesting and important, we are more focused on the duration and shape of the coming recession/recovery period – whenever it may come – and its potential impact on fixed income markets
Given the traditional levers of economic recovery have yet to return to pre-crisis norms, we expect the coming recession and subsequent recovery period will be U-shaped – a slowdown followed by persistently sluggish economic activity, leading to an extended period of downgrades and defaults among highly-leveraged corporate issuers. Trying to predict the timing of a recession can be a fool’s errand. That said, the growing sense of anxiety among investors is understandable. Though the fiscal stimulus enacted earlier this year has increased the probability the US cycle will soldier on for at least a few more quarters, a variety of indicators suggest the end is likely not too far beyond that.
Plastic waste – Esmé van Herwijnen, responsible investment analyst at EdenTree Investment Management
The world generates about 3.5 million tonnes of solid waste a day. The scale of the problem is huge and plastic pollution in particular has become a serious threat to the oceans and marine biology, as well as our soil, drinking water and human health. By 2050, there will be more plastic in the ocean than there will be fish.
Businesses are working together to find a solution to the plastic waste problem. In the UK, over 40 companies and organisations came together for the UK Plastic Pact. For investors, there are many opportunities to invest in companies that provide solutions to the waste problem or have adopted a circular approach to their business models. These are likely to benefit from the need to use resources more efficiently and to divert economically valuable waste streams.
Unbalanced China – Fabrizio Quirighetti, co-head of multi-asset at SYZ Asset Management
China is big, with its GDP having more than doubling over the last ten years, from $5trn to $12trn. As a result, it now has a much larger impact on the global economy, with the US is no longer the main engine. This is especially true given Trump’s ‘America first’ policies and is highlighted by the current global market soft patch, which occurred despite roaring US economic growth.
While the Chinese government has recently engaged in a balancing act, trying to eliminate shadow banking and shifting from an export-oriented to a consumer-led economy, it now has to deal with the trade war, rising US rates and an overall slowing economy – with the 6.5% GDP growth print in Q3 the slowest since 2009. It cannot cut rates anymore without exacerbating downward pressure on the yuan, nor can it rely on a large stimulus package, which would likely worsen the debt hangover. In other words, China has less room for manoeuvre.
Brexit uncertainty – Calum Bruce, director of Ediston Properties Limited and manager of Ediston Property Investment Company
Regardless of whether it is a ‘hard’ Brexit or not, the UK property market will be impacted in some way. There is no consensus view as to what will happen, but it is likely there will be a pause and more subdued property market activity.
This is what occurred immediately after the EU referendum in 2016, when investors and tenants alike considered the uncertainties of Brexit. It was exacerbated by the liquidity problems faced by daily dealt open-ended real estate vehicles. Many of these were forced to close to manage redemptions and sell assets, in order to increase cash levels. A similar outcome to this would not be helpful for the property market as a whole.
Encouragingly, in 2016, the recovery was quite quick and a post-referendum market was established. With Brexit on the horizon, there will be challenges ahead and central London offices remain the most vulnerable. However, in an uncertain market where investors adopt different stances on key issues, there will be opportunities to exploit.
Machine algorithms – Oliver Dobbs, CIO and founder of Credere Capital
Accelerating the trend of rising dislocations in the market is the rise of machines across the broader financial industry, which is creating fresh inefficiencies within bank securities and other assets. Across the globe’s trading floors, traders have given way to algorithms. While this is certainly driving necessary innovation, we, as an industry, are also losing something vital in delivering alpha – the human component.
Without this, there is no insight and judgement, which could have calamitous consequences. My belief is the next time we get a volatility event, it will be a lot worse than the recent spike because there will be no one to step in on the other side of the trade. I have seen multiple instances of trading on incorrect models, where the dataset has not been updated and there is insufficient human oversight. These disruptive trends are rapidly creating the potential for steeper sell-offs but also arbitrage opportunities. In the current environment, relative-value arbitrage strategies are a true uncorrelated solution offering both stable returns and reduced volatility.
Wage pressures – Mark Appleton, global head of multi-asset strategy at Ashburton Investments
US President Donald Trump’s corporate tax cuts and the widening deficit which ensued as a result, as well as the Federal Reserve’s quantitative tightening programme, are increasing the supply of treasuries in the market. This ‘perfect storm’ has pushed up the 10-year treasury yield to levels not seen since 2011, sparking concerns for risk assets.
The Fed is also forecasting more rate hikes than the market anticipates. We are not yet concerned about inflation further impacting bond prices, but we have our eye on wage pressures. The U6 ‘true unemployment rate’, which incorporates people working part-time because full-time work is unavailable, is still relatively high at 7.6% – versus 3.7% for the U3 standard measure. We are keeping a close eye on the U6 number, as wage pressures could build if we see the rate decline. This would then inflict pain on bond yields and have negative implications for global risk assets. At this stage however, we do not see bond yields rising significantly from current levels.
Jeremy Corbyn – Rogier Quirijns, portfolio manager of the Cohen & Steers European Real Estate Securities Fund
If the UK was to experience a ‘hard’ Brexit, this will more than likely increase the chances of Jeremy Corbyn coming into power. This would be a double-whammy for investors. A Corbyn administration’s impact on the UK property market could even be more damaging than the fallout from Brexit.
Corbyn’s long-held agenda is not business friendly, which could increase the risk within the office property space. Higher taxes would also hit consumers hard and, by extension, the retail property market. One of Corbyn’s first targets would likely be high-end London houses. In a bid to try increase availability of affordable homes in the capital, a Corbyn-led government would likely curb foreign property ownership – which would have a detrimental impact on prices across the board.