The ageing economic expansion is likely to continue through next year with some possible advantages for investors after a challenging 2018, according to Goldman Sachs Asset Management’s (GSAM) 2019 investment outlook, entitled ‘A Better Deal’.
For investors, late-cycle fears will continue to drive ‘episodic volatility and drawdowns,’ says GSAM, creating opportunities to invest at attractive valuations.
‘End-of-cycle signs – including contracting corporate profit margins, excessive central bank tightening and systemic financial imbalances – are not evident and we think we are unlikely to see them through the first half of 2019, though the risks will rise toward the end of the year,’ says Neill Nuttall, co-chief investment officer of the GSAM global portfolio solutions group, in a statement. ‘While there is enormous uncertainty around the length of the cycle, we feel it is too early to start to take down risk to prepare for the end of the cycle.’
GSAM believes 2019 offers a better deal for investors for three key reasons:
1. Continued expansion in global growth and corporate profits – GSAM believes US growth will moderate in 2019 while the slowdown outside of the US is now behind us. Many emerging markets economies remain in the early stages of recovery with room to run. In GSAM’s view, the continued global expansion will underpin corporate earnings growth and support risk asset performance
2. A low bar for positive surprises – Conditions heading into 2018 were hard to beat, resulting in a situation where most surprises were negative. That is not the case going into 2019. Macro expectations and asset prices have adjusted sharply lower, lowering the bar for positive surprises that could lift asset prices
3. Attractive valuations – In GSAM’s view, the significant shift in valuations in 2018 is overdone relative to both macro and corporate fundamentals. Investors’ concerns around the long cycle, trade tensions and populist politics will likely carry through to 2019, but GSAM believes it is too soon to position for the end of the cycle, and markets have already gone too far in pricing these risks.
GSAM prefers equity over credit, credit over interest rates and – regionally – emerging markets over developed markets. These preferences are based on attractive valuations relative to macro and corporate fundamentals.
Equities are GSAM’s preferred asset class. ‘We think the 2019 risk-reward for equities is improved relative to 2018 after the derating in valuation multiples observed this year. Selectivity is increasingly important amid higher volatility and elevated political and trade risks, as well as slowing revenue growth and margin pressures,’ states the report.
GSAM also says recent underperformance has created attractive valuations in corporate credit. The report notes: ‘Continued economic and corporate earnings growth may help to keep downgrade and default activity in check, while also affording over-levered issuers time to potentially improve credit quality. We favor exposure to issuers with strong or improving balance sheets, high interest coverage ratios and pricing power – given rising input and wage costs.’
And GSAM expects renewed outperformance of emerging market assets relative to developed markets: ‘Emerging market asset devaluations – particularly in currencies and equities – have surpassed what is implied by underlying fundamentals. In 2019 we expect emerging market asset performance to be unleashed by improving growth and upside policy surprises.’
