Time to Turn Down the Dial on Risk

04 July 2019

3 min read

Karen Watkin, CFA| Portfolio Manager—Multi-Asset Solutions

Welcome to the late, late stage of the economic cycle. The global economy is slowing, risks are rising and volatility will likely remain elevated after rising sharply in the first half of 2019. Investors would be wise to adapt a more neutral, well-diversified position, while leaving enough flexibility to take advantage of opportunities as they arise.

Trade tensions and global growth concerns have weighed on investor confidence over the last few months. Dovish comments from the US Federal Reserve and European Central Bank, as well as tentative signs of a stabilizing Chinese economy, provided some relief recently, but trade remains a top concern. We believe a strategic conflict between China and the West could cloud the investment landscape for years even if the two sides reach a short-term truce.

As for the economy, stability is about all investors can expect. We expect 2.6% global GDP growth this year, our lowest forecast since 2010, with growth of just 1% in the Euro Area. Evidence that the global economy may be weakening abound, including weak European and German manufacturing data and inventory overhangs across major economies.

We don’t foresee a recession, however, and both China and the Fed are likely to provide needed policy support. China’s economy should start responding to stimulus in the second half of 2019, while we believe the Fed will almost certainly cut rates in July. Unless three things happen simultaneously—inflation expectations rebound, trade uncertainty resolves quickly and a procession of strong economic data emerges—the July cut is likely to be the first of several, likely totaling 75 to 100 basis points in the next six to nine months.

Looking Ahead: Our Approach

In what is likely to remain a more volatile market environment, our equity focus is on companies with stronger balance sheets, greater stability and less market risk. Due to their increased exposure to trade risk, we reduced our tactical exposure to emerging market equities.

On the flip side, we’ve increased exposure to areas of the market less vulnerable to ongoing trade tensions. We moved from underweight to neutral in global real estate for example. While real estate valuations look somewhat rich on a long-term basis, they’re close to normal for the post-crisis era. The strength of the consumer, particularly in the US, should also help support the market. We also like US financials both for their relative imperviousness to trade issues and their potential to benefit from a steepening yield curve if the Fed eases.

While high-yield and investment-grade credit have continued to rally of late, we’ve reduced our high-yield credit position from a modest overweight to neutral. Spreads have moved closer to average levels, but we continue to see a low likelihood of a near-term rise in defaults. Meanwhile, issuance has picked up and investor sentiment has turned negative over the past month, removing two technical tailwinds that had been supporting high-yield assets.

The bottom line? With geopolitical and economic risks rising, now is a good time for investors to take some risk out of their portfolios.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

About the Author

Karen Watkin, CFA

Karen Watkin is a Senior Vice President and Portfolio Manager for the Multi-Asset Solutions business in EMEA. Along with being Portfolio Manager for the All Market Income Portfolio, she is responsible for the development and management of multi-asset portfolios for a range of clients. From 2008 to 2011, Watkin was portfolio manager for the Index Strategies Group, responsible for the development and management of AB’s custom index strategies for institutional clients in EMEA. She joined the firm in 2003, after spending three years as a management consultant in the Capital Markets Group at Accenture. Watkin holds a BA in economics with European study from the University of Exeter and is a CFA charterholder. Location: London

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Time to Turn Down the Dial on Risk

Looking Ahead: Our Approach

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