There has been a cocktail of challenges for investment managers in 2018, especially in the second half of the year. And it looks like 2019 will bring more of the same.
“While the global economy performed well in 2018, headwinds in the latter half of the year – like rising interest rates, continued tension and uncertainty around global trade, weakening global growth and slowing equity markets – will continue into the New Year and beyond,” said Jean-Philippe Provost, Senior Partner and Leader of Mercer’s Wealth Business in Canada.
Mercer has published its outlook for 2019 with some key global trends that will influence economies and markets.
Generally, the macroeconomic backdrop is positive as policies continue to assist both business and the markets in the near term.
Debt quality risk
But there is rising risk an overextension of credit with volumes of debt increasing while its quality is declining. Covenants are deteriorating, and speculative use of debt is becoming more evident.
Mercer says investors will need to be alert, prepared, and tenacious, to navigate an environment of ‘white water turbulence’ as contrasting bond and equity markets meet.
Then there is the question of how liquidity could be affected by the pull-back from the market by central banks. Increased participation by institutional investors in private markets will impact both private and public investors.
Growth in strategies between active and passive
A rise in the number of investment strategies that sit between traditional active management and traditional passive management is likely to benefit many investors not suited to either extreme.
Geopolitics will continue to create uncertainty and this is set to weigh on markets.
There could be a slow down of the pace of globalization or it could even go into reverse.
Sustainability is key
Mercer also sees a rise in sustainability, driven by regulatory regimes that will require those allocating capital to have a broader perspective of risk and return.
The incorporation of sustainability considerations into portfolios involves the need for a longer timeframe than that typically used for investment decision making. Investors who do take a longer term view may uncover opportunities that are not currently priced in.
“Managing investment portfolios in an environment this complex requires a steady hand and expertise,” concluded Provost.
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