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Special report: Outlook 2019

Managers guarded on expectations for stock, bonds in 2019

Epoch Investment Partners’ William J. Booth

Money managers think 2019 will be a year for caution when it comes to asset exposures.

In 2018, the MSCI ACWI returned -11.18%; Russell 3000 index, -6.99%; MSCI Europe index, -17.22%; Bloomberg Barclays U.S. Aggregate Bond index, 0.01%; and the Bloomberg Barclays Global Aggregate Bond index, -1.2%.

Looking ahead, sources think returns will be even harder to come by.

"While our focus is on equities, we stay abreast of the broader capital markets due to their linkages," said William J. Booth, managing director, co-chief investment officer at Epoch Investment Partners Inc. in New York.

"We think that U.S. equities can produce mid- to high-single-digit returns, driven by high-single-digit earnings growth and a 2% cash dividend yield, partially offset by likely valuation contraction due to higher rates and increased market volatility," Booth said.

Fixed-income markets, particularly high-yield bonds, "are significantly mispriced vis-a-vis equities and could be at the epicenter of the next financial crisis," he warned.

Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto, thinks the "risk environment is high and it doesn't feel like the time to take particularly aggressive risks as uncertainty is (also) high."

He thinks higher yields and still-elevated stock markets show the "risk premium is about as small as we've seen it dating back to the crisis. We might expect to squeeze a little more out of the stock market than bonds, but only a small amount and (investors would be participating) in a more volatile ride."

Mr. Lascelles also thinks there are "less compelling opportunities in terms of shifting across asset classes — it might be time (for) sticking close to home," and having some exposure to both stocks and bonds "might prove a reasonable strategy as there are fewer screaming opportunities."

Some money management executives are more cautious when it comes to fixed-income markets for 2019 than other asset classes.

"We are cautious on bonds over the medium term as we see firming inflation and expect yields to rise faster than market expectations," said Shoqat Bunglawala, head of the global portfolio solutions group for Europe, the Middle East and Africa and Asia-Pacific at Goldman Sachs Asset Management in London.

"We believe credit spreads are range-bound and are cautious as historically we have seen spreads begin to widen as we come to the end of the expansion phase of the economic cycle," he said.

Charles K. Bobrinskoy, vice chairman, head of investment group and a portfolio manager at Ariel Investments LLC in Chicago, said executives there are "nervous about fixed income, particularly long-term bonds." He cited the normalization of interest rates as something that "will be tough on the bond markets next year."

On the positive side, David Riley, chief investment strategist at BlueBay Asset Management LLP in London, thinks investors will look at structured credit and collateralized loan obligations to gain exposure to credit and floating-rate assets.

However, some are still keen on risk assets. Seema Shah, senior global investment strategist at Principal Global Investors in London, said since a recession is not forecast for 2019 the firm still prefers risk assets — "equities over fixed income, but within equities there is major regional dispersion."

"We have become more negative about U.S. equities, starting in the second quarter. We are inclined to look at reducing exposure to U.S. equities, but there are still a lot of global opportunities around. Japan is looking attractive," she added.

Ryan Primmer, head of investment solutions in New York at UBS Asset Management, said the firm remains positive on global equities going into this year.

"However, with monetary policy conditions slowly tightening, heightened geopolitical risks and with the range of potential macroeconomic outcomes broadening in the U.S. as the cycle matures, we see a continuation of the higher volatility regime."

But officials at the firm think higher volatility "does not preclude gains for equities — it simply means that the path ahead is likely to be bumpy and that risk-adjusted returns are likely to be lower," Mr. Primmer said.

As for emerging markets as an asset class, Aviva Investors thinks the region excluding China is set for modest improvement.

Michael Grady, head of investment strategy and chief economist at the firm in London, said it is "still appropriate to be underweight on duration assets, and we expect to see bond yields moving higher — not just in the U.S. but globally."

But the firm doesn't think bonds will "be the asset class to give you the traditional hedge" this year.