Investment chiefs fret over high debt and liquidity Crunch

CIOs overseeing $21tn expect volatility, protectionism and Brexit to pose big risks

Owen Walker

Many investment heads are warning clients to prepare for volatility next year © AP Photo/Brian Witte


Investment bosses at fund managers controlling $21tn of assets warn that high levels of corporate debt and tighter liquidity pose a risk to the global economy in 2019.

The executives predict that volatility will be an overriding feature of markets next year, while this year’s dominant events — Brexit, US-China trade tension and hardening monetary policy — will still influence their decisions.

Investors should strap in for a “wild and bumpy ride”, said Kristina Hooper, chief global market strategist at Invesco, the $1tn US manager.

She identified the three biggest risks for 2019 as protectionism, monetary policy shifts and high levels of debt. “Any one of these is significant. Together they represent a perfect storm, with the potential to negatively affect economic growth and roil markets,” she said.

Other investment bosses who singled out corporate debt as a significant risk included Pascal Blanqué, chief investment officer at Amundi, the $1.7tn French manager; Anton Eser, CIO at Legal & General Investment Management, the $1.3tn UK business; and Andrew Balls, global CIO for global fixed income at Pimco, the $1.7tn US bond specialist.

“Unlike the banking crisis of 2007-08, this downturn may be driven by over-levered corporates unprepared for slowing economic growth and sweeping technological change,” said Mr Eser. “Be wary of catching a falling knife — valuations are cheapening but we should wait for governments to support the corporate sector before relying on a sustained recovery.”

Mr Balls added that Pimco would be paying close attention to debt markets and liquidity should investors move out of fixed income. “It makes sense for us to be very cautious in terms of our overall corporate credit exposure, and see non-agency mortgages as offering a defensive alternative,” he said.

A trade war between China and the US has preoccupied market analysts this year, and several investment chiefs believe it will be a dominant global risk in 2019.

Stefan Kreuzkamp, CIO of DWS, the $780bn German fund manager, said trade tension edged out Brexit and Italy’s budget negotiations with the EU as the biggest risk for investors.

“The further erosion or potential dismantling of the world’s rule-based global trading order, and with it international supply chains, is a risk of a different order of magnitude to corporate earnings, investment and productivity growth,” he said. “This could drag down growth for the world as a whole for many years to come.”

However, Akiyoshi Nagashima, CIO of Sumitomo Mitsui Trust Asset Management, the $570bn Japanese investment company, was optimistic following recent talks between US president Donald Trump and Chinese president Xi Jinping.

“The biggest opportunity could be the potential de-escalation of tension between the US and China,” he said. “This will improve market sentiment and will undoubtedly be an opportunity for investors.”

Most investment heads contacted by FTfm said they were warning clients to prepare for volatility. Yet Suni Harford, head of investments at UBS Asset Management, the $800bn Swiss group, said there was a possible upside to giddy markets. “Higher volatility means plenty of opportunity for skilled stock pickers,” she said.

“The road ahead is likely to be bumpy but, on a selective basis, valuations feel out of kilter with fundamentals.”

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