Volatility will be driven by the list of macro-concerns that people have been talking about all year – trade war tensions, rising interest rates, “political populism” in Europe and slowing global growth, according to Milligan, who spoke at a media event in Hong Kong yesterday.
“We anticipate a 5%-15% correction in global equities at some point in 2019,” he said. But he doesn’t expect a bear market to begin.
“Barring a major shock, share prices will eventually recover as the outlook for company profits remains positive, even if margins are coming under pressure.”
Andrew Milligan, ASI
To prepare portfolios for volatility, he suggested holding a high cash position. Buying opportunities will emerge as markets plunge and solid assets can be bought at a cheaper price.
Second, buy specific risk assets. The MSCI EM Index is down 14.5% year-to-date and he believes “emerging markets look reasonably priced, with some, such as China, far cheaper than last year.
“As long as political tensions do not deteriorate materially, valuations and profits can reassure investors in 2019.”
His third piece of advice for volatile markets is to diversify away from a traditional balance between stocks and bonds, which he said are highly correlated.
He suggested portfolios hold “a mixture of equities, emerging market debt, US Treasury inflation-protected securities and European real estate.
“Private market assets also remain attractive, offering better risk-adjusted returns and less correlation to market volatility,” Milligan said.
In terms of global equities, he said ASI prefers US, European and Japanese stocks, but he did not provide further details.
Volatility and China
Milligan sees increasing market volatility as a time for actively-managed funds to earn their fees.
“As dispersion between the winners and the losers heightens in a volatile market, active stock selection will become more critical.”
This is particularly true in China. Nicholas Yeo, head of China equities, said in 2019 the firm is picking A-share companies that are expected to benefit from consumption growth.
Yeo singled out premium brands with rising average selling prices amid the demand for healthcare, travel, insurance and other lifestyle-led services as the middle class expands.
As for major concerns, ASI does not see a US recession in 2019, but Milligan expects a “growth slowdown” in 2020/21.
However, one big concern is a major escalation of the US-China trade conflict, which he said will derail markets.
“The hardest hit could be some Asian economies such as Malaysia, South Korea and Thailand, where much of the value-add embedded in Chinese exports to the US originates from,” Milligan said.