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 Mark Nash, Head of Fixed Income for Merian Global Investors.
Hi Mark.
Mark Nash: Good morning Emma.
Wall: So, it has been quite a challenging year across all asset classes. Why should we be optimistic heading into 2019 for bonds?
Nash: I think we should, and I think it's not just the bond market it's the general sort of risk environment. So, I do think we'll improve in 2019. Essentially the story of this year is you've had global monetary tightening at a time when generally global growth has been falling. And so, we've seen the impact across asset markets, it's been really bad. Literally 96% of fixed income and equity indices have actually posted negative returns.
But going forward what we see from now is finally the Federal Reserve is trying to sort of ease up on their tightening and the reason for that is it's now the sort of tightening that they have impacted on the world is now coming back to the US shores. You are starting to see credit indices start to widen. You are starting to see little bit of a slowdown in the US. We are starting to see equity markets come off. And the Fed will take note of this and start to sort of ease back on their gradual tightening programme.
They are still going to do probably two or three more hikes, but then that will be it. Now markets can get a little bit more relaxed about the risk outlook on the back of that. And emerging markets then should start to bounce back. Equity markets in Europe also, risk markets in fixed income land in Europe should have a better time next year.
Wall: Because the Fed seems to be the thing that we're all worried about again across asset classes if rates rise too quickly it has impact for bonds and for equities. Inflation is one of the things that could push it higher, but it sounds like you are not too concerned about that.
Nash: Not really, I mean everyone's talking now about the increase in wages that we are seeing. Which is absolutely a good thing, given the political backdrop we're seeing in the west. But those wage rises are pretty low at the moment. They are going up very gradually and if wages are rising less than productivity, it doesn’t mean that inflation is about to kick off in a big way. If inflation is going to be sort of going up but very gently then central banks can continue to raise rates, but also very gradually and that should be positive for asset markets. Now I do think Jerome Powell is different type of central banker.
He's very pragmatic. He's going to recognise the fact that there is no inflation problem in the US and therefore his rate rising programme can be pretty gradual. And the last thing he wanted to do is knock these wage rises on the head. Because wage rises are a good thing and all these authorities actually do enjoy the fact that they are happening.
Wall: So far more positive it sounds but there must be particular pockets of opportunity that you like going into the next year. Where are you seeing those?
Nash: Absolutely. For example we really like subordinated bank financials. Now bank equities and bank bonds have had a really bad time this year in Europe especially because we've had this monetary tightening, mostly on the back of the Fed but also the ECB sort of reining in their tightening programme. And also a slumping growth pretty much all year essentially on the back of their monetary tightening and also the slowdown that we are seeing in China. We see the broader sort of growth backdrop in the west is pretty good.
It is broad based, investment spending is happening, domestic demand levels are picking up in the US and also Europe. Therefore, it's a good backdrop for when you get some stability in the Chinese situation which we believe should be happening in due course. But then the growth outlook looks good and these sort of risk markets these bank bonds can start to do a little bit better.
Wall: Mark thank you very much.
Nash: Thank you, Emma.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
Merian Global Investors was formerly called Old Mutual Global Investors
