Patrick Brenner, Schroders
“We expect global equities to deliver positive returns next year,” Hong Kong-based Brenner said at a recent media briefing.
He explained that the main drivers for global equities in 2017 were earnings. However, global equity markets suffered last year as valuations became too expensive.
But Brenner expects that the negative sentiment caused by the trade war, as well as downward earnings expectations, will make valuations more attractive.
“We believe this creates an interesting environment for equities,” he said, noting that although earnings expectations are revised, they are still positive for most markets, especially in emerging markets.
Market and sector preferences
Within global equities, Brenner believes that emerging markets should outperform European markets.
Earnings growth expectations for both markets are at the same levels – Europe at 9.3% and emerging markets at 11.5%. However, valuations in emerging markets are more attractive, according to Brenner.
Source: UBS Asset Management
Other fund managers, such as T Rowe Price, have noted the cheaper valuations of emerging markets, especially in Asia-Pacific, when compared to global markets.
Brenner identified certain equity sectors he believes will perform well. Within Europe, he likes financials as he expects interest rates to rise in the region. “Typically, financials should perform better [as interest rates rise] better than the broader market,” he said.
Within the US, he predicts that the healthcare sector will outperform the broader US equity market.
“Typically, healthcare tends to do very well every time we are in the late cycle, and even when you come into a recession,” he said, noting that he does not expect a recessionary scenario in the near term.
“The [healthcare] trade has performed very well already, and even from a valuation point of view, it still looks attractive versus the whole market.”
His predictions for global markets come as Schroder’s chief economist Keith Wade downgraded the forecast for 2019 global growth to 2.9% from 3.1%. He reasoned that US GDP growth is slowing and “others fail to strengthen”.
Brenner said that investors should have hedges in their portfolios to protect them against the risk of a global recession. These hedges include being long gold, long yen versus the euro and being short US investment grade.
The firm’s Asian Asset Income Fund, a multi-asset fund that is managed by the mixed-asset team, has 53.9% of its assets in equities and 35.2% in fixed income, according to the fund factsheet.
Brenner noted that within fixed income, he likes onshore Chinese government bonds.
“You are seeing a rising interest rate environment in the US, whereas in China, it is probably the only market that interest rates have been down.
“Within a fixed income government bond allocation, this could provide a lot of diversification because they are not correlated to the US or even the rest of the world,” he said.
The Schroder Asian Asset Income Fund versus its sector