Investment experts reveal their resolutions for 2019
In 2018, we saw falling returns in almost all asset classes and increased volatility throughout the year, particularly stemming from political events across the globe. However, given cheaper valuations and our constructive outlook for US-China trade tensions, we see reasons to be confident for the upcoming year. Several investment experts at NN Investment Partners (NN IP) look back at 2018 and reveal their investment resolutions for 2019.
Han Rijken, Head of Specialised Fixed Income: ‘2018 was a difficult year for credit spread markets, and we expect the challenges of central banks withdrawing and global geopolitical uncertainty to continue into 2019. With credit spreads at reasonable attractive levels, against still-healthy credit fundamentals and reasonable growth expectations, the entry point for investing in credit spread markets is approaching. In the coming year, we resolve to take advantage of this entry point while maintaining our sustainability focus.
‘Credit spreads in the public markets are becoming more attractive, and spread levels in Alternative Credit, the illiquid credit markets, will follow at a delay, as the public credit markets are typically used as a pricing reference. Alternative Credit remains a compelling and growing market segment. We believe the disintermediation of the banking sector will continue, leading to an increasing set of opportunities for investors, in terms of both yield and diversification of idiosyncratic risks and structures.
Finally, sustainability in credit spread markets will become even more important in 2019. We see a global trend towards increased focus on ESG in the bond markets. Subsequently, the green bond market will grow in terms of size and diversity, and ESG integration will develop from solely negative screening into a focus on contributing to society. With this in mind, we will continue prioritising ESG factors in our investment process in 2019.’
Huub van der Riet, Lead Portfolio Manager Impact Investing: ‘In 2018, we saw continued emphasis on ESG and impact investment as a theme across asset classes as investors became ever more conscious of the potential impact of their investment choices. Impact investing is an extension of ESG investing, with a focus on offering solutions to make a positive contribution to sustainability goals. The 2015 adoption of the United Nations Sustainable Development Goals has prompted a rise in environmental awareness among listed corporates, with many firms developing solutions to combat global challenges such as climate change and water shortages. The NN IP impact opportunity strategy has flourished in recent years by investing in solutions-focused corporates that align with our longer-term investment horizon. In 2019, we resolve to continue making a positive social and environmental impact while earning attractive financial returns.
‘Despite the increased focus on ESG investment, there is still a prevailing myth that a focus on societal impact will negatively affect financial returns. On the contrary, we believe that stocks with a positive impact can have a lower risk profile, as they don’t face the risk of potential environmental taxes and are less likely to become stranded assets. In the coming year, we aim to continue combating this myth through results-focused investment in high-quality, innovative companies that are positioned to benefit from long-term themes. We also resolve to continue regularly engaging with all portfolio holdings to ensure that our impact and financial investment cases remain compelling.’
Sebastiaan Reinders, Head of High Yield: ‘The elevated volatility of late 2018 has brought about investment opportunities in the high yield market, and going into 2019, we resolve to capitalize on these opportunities. Over the past three months, credit spreads on high yield bonds have widened by almost 2% and dispersion in bond prices has increased materially, making us more optimistic on total return opportunities and alpha generation. We also see strong fundamentals, such as strong liquidity and interest coverage and stable leverage. With most of the anxiety around macro factors (such as geopolitical uncertainties and an ageing business cycle) still being “just fear”, we think the market is pricing in too much negativity. As a result, we are finding more investment opportunities in strong companies with improving credit metrics and near-term triggers for investment cases to materialize.
‘In 2019, our goal is to take advantage of these opportunities by utilizing our analysts’ credit fundamental toolbox, while navigating the rapidly changing market environment with an adaptive mindset. We also aim to magnify the positive impact of our traditional credit analyses by integrating our latest insights on responsible investing, behavioural science and quantitative analyses. By doing so, we hope to maximize returns both for our clients and for society. We think 2019 will be a very exciting year!’
Jasper van Ingen, Senior Portfolio Manager Convertible Bonds: ‘2018 was a difficult year for global financial markets, with an unusually high percentage of markets across all asset classes posting negative returns. Global convertible bonds held up fairly well, posting modestly negative returns. The equity sensitivity of the asset class decreased alongside global equity markets, and the fixed income component shielded investors from further declines.
‘Looking forward to 2019, we aim to stay focused on market fundamentals and to be mindful of cognitive biases, such as the recency effect. The recency effect convinces investors that new information is more valuable and important than older information. This may be true, but it is not necessarily so. Investors tend to base their market expectations on how the market has been performing recently, whether good or bad. In times like this, it is easy to overreact. Our resolution for 2019 is to focus on the long term, and to continue using the merits of the convertible bond asset class as best as we can. This has served us well in the past, and we are convinced it will give us the highest probability of success in the future.’
Alistair Perkins, Head of Infrastructure Debt: ‘We believe that the definition of infrastructure (and with it, the space to invest debt) will continue to expand in the coming year. Although core infrastructure assets with lower correlation to economic cycles are attractive during times of increased market volatility, the dynamics of the infrastructure market are shifting. We are seeing fewer public-private partnership schemes, rapidly maturing renewable energy markets and new fields of infrastructure demand (such as digital infrastructure). The growth of infrastructure equity funds is further driving the infrastructure market’s expansion beyond the traditional core sectors. With our experienced investment team, we aim to take advantage of this expansion to effectively navigate the market and capture maximum value for our clients.
‘Overlaying this, we anticipate a stronger and more critical focus on sustainable investment. It will become more crucial to distinguish funds with a truly sustainable investment philosophy that is properly reflected in the investment process from those that are only marketed as such. This will benefit asset managers that look beyond the metrics and generate measurable alpha in doing so. With this in mind, we resolve to maintain our sustainable approach to asset selection. This approach not only strengthens our ESG focus but also acts as a hard credit risk metric for infrastructure projects, which often have technical lifespans exceeding 20 years. Although we foresee ample opportunity for capital deployment in 2019, it will pay off to maintain a disciplined approach to infrastructure debt with a clear view through the credit cycle and a well-developed ESG selection process.’
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