- Kate Moore, the chief equity strategist at the BlackRock Investment Institute, spoke with Business Insider to give her outlook for 2019.
- Moore discussed how the Federal Reserve will drive volatility across asset classes next year. She also explained BlackRock’s overweight on emerging markets, weighed in on the trade war, and broke down her firm’s other major themes for 2019.
Kate Moore, the chief equity strategist at the BlackRock Investment Institute, spoke with Business Insider senior investing editor Joe Ciolli about Federal Reserve-driven volatility, emerging markets, the ongoing trade war, and investing themes for 2019.
Following is a transcript of the video.
Joe Ciolli: I’m here with Kate Moore, the chief equity strategist at the BlackRock Investment Institute.
Kate, you guys just published your 2019 outlook, and I wanted to see what you’re thinking about the Federal Reserve. It seems like something that’s been popping up a lot in your outlook. There’s a lot of uncertainty around it. Can you explain sort of how that’s gonna lead to volatility across all asset classes?
Kate Moore: One of our big themes for 2019 is more about policy uncertainty and getting closer to neutral with the Fed, but frankly not being able to perfectly predict monetary policy in every other country. A lot’s gonna be dependent on what happens to US growth, the labour market, inflation, and whether or not we get a pause from the Fed in the first part of the year, or in the second part of the year.
Interest rates have been weighing heavy on investor minds, even though we don’t think they’re at a level that holds back activity or should really stop companies or individuals from investing. It’s been a common excuse throughout 2018. For why people are worried about being at the end of the cycle.
So I would say focusing on the Fed, and all of the language and communication they give us over the next couple of months – what their plans are in March and in June, in particular. I think that will really dictate and really sort of help frame how people think about risk assets throughout the year.
Ciolli: Fed Chair Powell mentioned that maybe rates were a little bit under where they wanted them to be, and that was interpreted as sort of a dovish slant. Maybe a little more dovish than we’re used to from him.
Ciolli: And we saw the stocks rip higher because of that. What do you make of that? Is it just an example of the volatility we’re gonna see, or is it gonna be a straight leg up for us?
Moore: So I think equity investors, and sort of risk assets in general, really like to feel like there’s nothing standing in their way. And as I was mentioning before, it feels a little bit like market participants have been worried about higher rates – holding back or curbing activity in 2019 and onwards.
With Powell saying they’re closer to neutral rates than not, I think that’s something we already knew. We knew that there were more yesterdays than tomorrows when it comes to the rate hiking cycle. That wasn’t news, but the way he framed it gave confidence that there wasn’t going to be a significant overshoot in terms of policy rates. That really holds back activity.
I think we’re just tweaking things on the margin, changing the language a little bit. But it doesn’t really change the fact that we are still in a sustained, we believe, economic expansion. And that while the pace of growth is going to be slower, the Fed will continue to have to adjust monetary policy to reflect that growth.
Ciolli: Got it. And the US has been outpacing it’s European and Asian counterparts for a lot of the last year or so, and I wanted to see if you think that gap is gonna close at all? Will we see sort of a convergence of asset returns, or is the US gonna continue to sort of dominate the rest of the world?
Moore: Yeah, we’ve been really favouring the US over Europe and Japan for much of the last 12 months. In fact, I’ll tell you we got a little bit of heat for upgrading the US in the first part of 2018 and downgrading Europe and Japan. Because people said hey look, if you’re right about a synchronised global economic expansion, shouldn’t that be good for all of these stocks?
The truth of the matter is that both European and Japanese indices are made up of much more value stocks or traditional type of value plays than the US, which has more of a growth tilt to it. We think investors are still going to be paying up for growth, and that the US has a better market composition for this stage of the cycle.
Frankly, we wouldn’t expect Europe or Japan to significantly outperform, unless economic growth significantly accelerates. The second derivative of growth gets much more positive. And that’s not our forecast for next year, or for the beginning of 2020. So we’re sticking with our overweight of the US for now.
Ciolli: So you mentioned these value stocks, which have clearly been downtrodden – value investors have gotten hurt. I’m wondering if you think that they’re going ot make a comeback at any poin. Is that in the cards? And when that does happen, is it something that could life Europe and Japan versus the US?
Moore: Yeah, so value is a really tricky topic, and something we’ve debated a lot – most recently at our BlackRock Investment Institute Year Ahead forum.
I just want to say there are lots of ways to think about value. There’s value as the overall equity style. There’s value as the factor, which often times is sector neutralized so you’re not getting that additional market exposure. And then there are lots of different ways to define value. So, sometimes when we’re talking about value, we’re all talking about different things.
Our view is that value the style does best in these periods of economic expansion, or the acceleration, as I was mentioning a moment ago. It seems unlikely that the style is gonna considerably outperform.
I would note that some of the stock that looks cheap in the market right now is cheap for a reason. And I don’t want to say it’s all structurally impaired, but disruption and changes in consumption patterns and this uncertainty we were talking about before in terms of monetary policy outlook, makes it difficult to buy some of the just-cheap-from-a-multiple-perspective stocks.
Some of the stocks that are more expensive frankly deserve a premium. We have better clarity on earnings, better clarity on the business model, and they might be market leaders in their industry.
Ciolli: And one area internationally that you actually favour, according to your outlook, is emerging markets. Amid the trade war and all these tensions, we’ve seen emerging markets get hit this year. Why the comeback? Why is that an area you’re going overweight going into next year?
Moore: I’m gonna do full mea culpa on this one and tell you that we’ve been overweight emerging markets throughout all of 2018, despite the significant underperformance we’ve experienced.
And that was really based on a solid global macro backdrop. The fundamentals being good, the earning story, the margin story, the sales-growth story in the EM looking very solid, particularly relative to non-US developed market peers. Valuations not being demanding, and sentiment not being overdone. A lot of the tourist money that was in emerging market stocks at earlier times in the post-crisis period had left. We felt pretty good.
What was impossible to predict, though, is what was going on in terms of policy and the trade war and positioning and tweaks. With all of that in mind, we don’t see actually a deterioration in fundamentals even though EM has de-rated more than other regions. And so we’re sticking with our overweight call for 2019.
Ciolli: Got it.
Moore: It is absolutely true that a trade war, or an escalation of the trade war in 2019, would be an obstacle. But I think we’re starting to see companies react and think about their supply chains, think about their relationship, and sort of hedge some of their positions to provide a buffer against any of the potential economic downturn from that.
Ciolli: And in your asset allocation strategy across all of these different assets, you have a barbell approach. I know on one side you like high-quality assets, but what about the other side? Can you break down this barbell approach and what it means?
Moore: We think we’re in the later stage of the cycle. So let’s be clear, our barbell approach doesn’t mean just hold an anchor in high quality, which we think you should, and then just swing for the fences and lower quality assets that seem to be de-rated.
That would be great if we didn’t have any worries about policy – both the monetary side as well as the trade policy to consider. But what we think people should be focused on are companies that have excellent balance sheets, that have business models, that are sustainable through all parts of the cycle.
That’s where we’re not expecting to see huge amounts of earnings volatility, even if we continue to have a sequential economic growth slowdown. Although again, still above-trend, so still pretty good.
But also think about what areas of the market, whether it’s industries or assets, have really fallen out of favour, like emerging markets this year. Places where the fundamentals haven’t deterioriated, and be willing to take a bet on some higher-volatility, slightly riskier assets as well. So this barbelled approach, don’t take risk entirely off. But if you need to sleep at night a little bit better, make sure that there’s big quality nut to rest on.
Ciolli: We keep talking about the possibility of an economic recession, but it does not seem like it’s in your base case for 2019. However, you do mention that the table may be set for something in 2020. Can you outline your recession view and what, if anything, people can do next year to prepare for that if it does transpire in 2020?
Moore: I think actually it’s consensus at this point that 2019 is not the year that we have the US-led recession.
I also just want to note something here. A lot of times when we talk about recession in our outlook, and then also talk about recession in the market, it does tend to be a little US-focused. And that we need to recognise that different regions and countries and markets are at different points in their cycle. I think about this a lot as an equity person. The profit cycle is really different, region from region. And we had seen some profits recessions in non-US markets, even while the US continued to make new highs.
So, that aside, in 2020 and onwards, we think that recession probability increases for the US. Part of that is because we are just at the later stage of the cycle. We also know that it takes some time for tighter monetary policy to really play out in the economy and have an impact. It’s possible that we’ll see a slowdown in activity at that point, or greater inflationary pressure, frankly, from higher wages feeding through. It’s not our base case at this moment, but it’s a non-zero probability.
We recognise that investors need to be positioned for that eventual slowdown, well in advance. As you know, equity markets tend to price in these changes in economic growth far before we would actually get the data. We just want to have quality portfolio construction and make that a significant thing that we’re focused on in 2019. So that we don’t get to 2020, when the economic data starts to soften a little bit, and find ourselves flat-footed.
Ciolli: One last one – if you had to pick one asset or one geography, what’s your big pick for next year?
Moore: Are you asking me this on a risk-adjusted basis, or do you just want me to swing for the fences a little bit?
Ciolli: Let’s swing for the fences.
Moore: I would say Chinese tech. It’s really underperformed this year for a variety of different reasons, mostly because it’s been hit from sentiment on trade. But also because there’s been a sort of a significant headwind from policy and regulatory adjustments throughout this year. That was limiting both sales and earnings growth for a lot of the big tech companies.
I think if we have an easing of trade tensions, growth is strong, and there’s a lot of backlog of demand on the Chinese consumer part for tech services, hardware and content, we’re gonna see solid earnings growth in 2019. I think the sector could re-rate. It’s a bold and potentially highly volatile call, but that’s what you asked for.
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