Mercer, a global consulting leader in advancing health, wealth and career, has warned that 2019 will be a challenging year for investors, with risks in markets at their highest level for several years. In its Economic and Market Outlook 2019 and Beyond, Mercer has identified key investment themes expected to influence economic and market dynamics in 2019. These themes should be considered by pension trustees and investors and include:
In 2018, the global economy performed reasonably well, although market sentiment deteriorated significantly over December as investors considered what lies ahead. Current market dynamics include strong consumer spending, improving labour markets and rising wages, but investors are balancing these positives against rising interest rates, concerns over “peak” corporate earnings and trade wars.
Paul Kenny, Head of Investments, Mercer Ireland said:
“2019 promises to be a challenging year for investors. Amidst the headlines and predictions, investors need to consider what remains appropriate as a long-term investment strategy. The investment themes we have identified should help trustees and investors do just that.”
“The level of uncertainty facing pension scheme trustees and investors in 2019 is significantly higher than in many previous years Pension scheme trustees, in particular, will need to ensure they have well-developed and robust investment strategies in place that will allow their pension schemes successfully navigate what could be a difficult period.”
The first key investment theme identified by Mercer is “white-water” turbulence, where the macroeconomic backdrop still continues to be positive, and pro-business policies and strong levels of business optimism should provide support to equity markets. However, there is mounting evidence of overextension of credit. Outstanding debt is increasing, while quality is decreasing. Covenants are deteriorating and speculative use of debt is becoming more evident. When these equity and bond market dynamics meet, there is scope for “white-water” turbulence. Navigating such an environment will require investors to be flexible while remaining focused on long-term goals.
The second theme of “Winds of change in market participation” reflects changing roles of key market players. Central banks are trying to reduce their market involvement, but the implications of this are uncertain. Alongside this change, institutional investors are increasingly investing in “private-market” assets, and investors are increasingly considering strategies sitting between traditional active and traditional passive management. Both these dynamics are likely to further impact market liquidity and pricing for private and traditional public assets.
Political fragmentation has been a recurring theme in recent years and is likely to continue to be so. Trade tensions are threatening globalization, and it is possible that the pace of globalisation may slow, pause or even go into reverse. Whilst more turbulence in global politics is likely to continue to weigh on markets, rising volatility should present opportunities for some investors and strategies (such as hedge funds or multi-asset funds).
Finally, we expect the focus on sustainability to continue to increase. Governments, regulators and beneficiaries are increasingly expecting those with responsibility for allocating capital to take a broader perspective of risk and return. The incorporation of sustainability considerations into portfolios involves the need for a longer time frame than that typically used for investment decision-making, and investors who do this may uncover opportunities or risks that are not currently priced in.
Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With nearly 65,000 colleagues and annual revenue over $14 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.