Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Thomas Poullaouec, Head of Multi Asset Solutions for T. Rowe Price APAC.
Hello, Thomas.
Thomas Poullaouec: Hello, Emma.
Wall: So, what a week we've had for global equity markets. We saw considerable sell-offs, but they have rebounded somewhat. This volatility was a shock for many people, but I don't think it was for you because you were saying towards the end of last year that people should be more cautious on equities, volatility will return, weren't you?
Poullaouec: Yes, we had four themes to start 2018, one of which was volatility to rebound. We thought that the calm that we had throughout 2017 was quite unusual and we were due for a sell-off which occurred in the past week after a strong month of January which makes the year quite flat now.
Wall: And how does one invest in an environment where volatility has returned because for many people investing over the last couple of years, they just simply haven't seen volatility? It's been remarkably low.
Poullaouec: Yeah, and volatility is part of the game when you invest for the long term. We think that when you have time in front of you, you can still be heavily invested into risk assets and the environment is still conducive in terms of growth, earnings for the medium-term. But yet, you still have to position your portfolio and hold some assets which might protect you. That's why we have some overweight in bonds, cash or long-term bonds which can protect on the volatility.
Wall: And that's a good point to make because you are a multi-asset investor. Not everybody has all those different levers to be able to pull. But you still think that there is some gain to be made from equities, but presumably not the sort of 20%-plus that we saw last year?
Poullaouec: Definitely, we were expecting quite modest middle single-digit returns this year. The key would be earnings. So, earnings are challenged with the rise of inflation, but also the economic environment is still positive for growth to be there. So, we are not expecting price multiple expansion, but we are really seeing growth in equity driven by earnings and that's why we are overweight in countries or sectors where we see better earnings like outside the U.S.
Wall: And where are those outside the U.S. countries? Is it about emerging markets again this year because 35%, not bad for 2017?
Poullaouec: Yeah. So, emerging markets did better during that episode of volatility. We see that especially in Asia we are more comfortable in some of these sectors like even technology which we favor in some of our portfolios. Japan and Europe are also in developed world regions where we would have overweight in our portfolios.
Wall: And I suppose the concern when volatility like this return and indeed, people like yourself are saying, we are taking a more cautious stance, we are holding more cash, more bonds is that actually this is the beginning of the end. It's not going to be just volatile; it's going to be a falling market. Do you think we've reached that point yet, that the market cycle has come to an end?
Poullaouec: We don't think so. When we talked about volatility at the beginning of the year, we were talking about a correction and not a bear market. Why is that, is because the economic environment is still positive. We are not seeing any sign of recession yet. So, that means that after this correction we should see a rebound which could be in some cases some buying opportunity for investors.
Wall: So, do you think that this year will just be about capital preservation? Or do you think it's about low amounts of growth, the last little bit, eking out those last gains from the market cycle?
Poullaouec: You have to be careful of trying too hard to gain these returns. What we see that there is a potential for active managers to really do well in this environment where the market beta will be lower than what we had but alpha has a potential to add value and a higher contribution to total return. So, we think that it's a year where active management, being nimble in the asset allocation will be more fruitful for investors.
Wall: Thomas, thank you very much.
Poullaouec: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
