SYDNEY (Reuters) - Buckle up is the investment advice of Australian fund manager Perpetual as everything from the global economy, to corporate earnings and central bank largesse goes past peak and downhill.
“2019 will be exceedingly difficult for all risk markets,” warns Perpetual’s head of investment strategy, Matt Sherwood. “It’ll be very, very hard to make returns as volatility spikes.”
His laundry list of concerns included a peak in corporate earnings growth, central banks withdrawing liquidity while the Fed tightened, Brexit, trade wars, Italian debt and a slowing U.S. economy.
Perpetual has already reduced risk exposure in its A$30 billion ($21.71 billion) portfolio while lengthening duration by around half a year.
Sherwood favored defensive stocks and strongly recommended the use of options for “cheap” downside protection. While not focused on currencies, he favored safe havens including the yen and U.S. dollar.
One major drag will be an expected slowdown in the U.S. economy, with Sherwood tipping annual growth of just 1.5 percent by the end of next year.
“Synchronized global growth is long gone. Every major region is slowing,” he added.
Combined with rising wages, slowing economic growth augured ill for corporate profits. After three stellar earnings seasons in a row, markets still had growth of 12 percent factored in for next year. Sherwood expects just 5 percent.
All of which meant the Federal Reserve was unlikely to lift interest rates to neutral and beyond.
“The Fed has tightened at a heart-stopping glacial pace so far, and I think they only have three more hikes left in them,” said Sherwood.
He saw potential for emerging markets to outperform, but only if the U.S. dollar stopped rising and China revved up its stimulus efforts - two exacting requirements.
He was also cautious on the Australian outlook, calling the housing market a “slow-motion train wreck” even as the economy had performed strongly.
Excessive leverage among households made them highly vulnerable to any increase in interest rates and/or a rise in unemployment.
Policy makers had limited room to react given rates were already at a record low of 1.5 percent, meaning the pain of adjustment would likely fall on the Australian dollar.
Reporting by Wayne Cole; Editing by Sam Holmes