The global macro and monetary policy environment has become more supportive for fixed income spreads. Corporate bonds and emerging market debt now offer better compensation for risks. This environment can prevail as long as growth stays sluggish and monetary policy stays supportive.
The German economic slowdown in the second half of 2018 is likely to be just a soft patch. The strong labour market, fiscal expansion and the rebound from incidental factors should keep growth in positive territory for most of this year.
Climate risk may be far more short-term than generally believed. An investment process that incorporates environmental, social and governance considerations enhances the investor’s awareness of climate risk, and is more adaptable to changing circumstances. This makes portfolios built with an eye to ESG factors more future-proof.
2018 was a challenging year for all risky assets including EMD as a negative combination of risk factors affected investor sentiment, at a time when valuations were at unattractive levels after the strong performance of 2016 and 2017. Rising US yields, a strengthening US dollar and expectations of slower global growth amid concerns about an escalating trade war between the US and China created a toxic environment for risky assets. Idiosyncratic noise in some important EM countries such as Argentina and Turkey, a heavy and uncertain EM election cycle and negative headlines in Europe (particularly related to Brexit and Italy) all fuelled negative sentiment. We believe that most of these risk factors will dissipate in 2019.
Fed revises its outlook for rate guidance and balance sheet in a surprisingly dovish shift. Worries about overheating of the domestic economy have abated for now; Fed is now more prepared to take action against downside risks in the economy and the markets. A more dovish Fed could lead to upward pressure on the euro and the yen, which may force the ECB and the BoJ to keep their rates lower for longer.