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1. High yield fixed income and emerging market debt

Having sold off aggressively during the second half of 2018, this asset class is becoming attractive, in our view, yielding circa 7%. Short-dated global high yield (under three years) can be bought with yields of 5% or more. We particularly favour the Kames Short Dated Global High Yield Fund. In addition, we believe corporate loans are good value. A broad cross section of aggregated loans to blue chip issuers can be purchased at discounts
to par, with coupons of close to 10%. Overall, high yield as an asset class yields a striking 500 basis points over US Treasury bills indicating global investors are anticipating a recession. This is not our central case. We believe emerging market (EM) debt too is outstanding value, both in absolute and relative terms, with EM sovereign credit yielding widely 6% and 7%. EM corporate debt and loans yielding even more than this.Consequently, we rate these asset classes a BUY.

The global economic ship still has a fair wind 
Singapore PMISingapore PMI – a typical proxy for world growth 

Contrary to the current pessimism pervading world markets, corporate leverage in 2018 has moved lower…
topLeverage ratios decreased to a post crisis low

And EBITDA margins higher…

2. US short-dated debt

In the US, short-dated (out to five years) Treasuries, TIPs and investment grade bonds we believe are worth owning as cash alternatives. Further Fed tightening should be limited, and current yield levels offer some protection.

We avoid Gilts and European government bonds.

A “no deal ” Brexit would provide a great selling opportunity for Gilts given some of the other political risks lurking in the background and the other possible outcomes should see a return to confidence and some tightening in rates during 2019 by the Bank of England.

3. The US market- preference shares and infrastructure our top picks

There is an active global market in the issuance of preference shares. This asset class allows the issuer the opportunity to offer the investor a large dividend in return for investing in undated and non-voting shares in the company. Many large global financial firms such as HSBC and JPMorgan offer these and the iShares US preferred ETF has a value of US$14bn value and yields 7% which is highly attractive in our view.

…and we like US infrastructure themes.

We believe investment in US infrastructure is likely to accelerate in 2019 as a result of increased spending by Congress. It is one of the key areas that both executive and legislature can agree on and is likely to be encouraged in both houses of Congress. We believe an “easy” win for both the US president and Democrat House of Representatives will be to “build, build, build à la FDR in the 1930’s, especially since housing starts weakened throughout 2018 and this will provide a support to economic growth via a boost to construction. Major blue chips such as capital goods machinery companies, and building materials stocks, along with specialty suppliers of cement should do well.

The US market- preference shares and infrastructure our top picks


Also making it onto any “BUY” list in our view are lumber and other building materials as well as forestry.

All these sectors should profit from this dynamic in 2019.

4. Global dividends, top picks

2018 has been a record year for dividends and into 2019 many investors are questioning whether it can last.

Healthy dividend income is not confined to the US. In Brazil, India Russia, and even China, dividends are at an all-time high. Furthermore, there is evidence as Asian growth slows and Asian families look to generate greater income from their investments, a higher percentage of corporate profits in the important Asian markets will be paid out as income.

Aberdeen Asia Income Fund and Invesco Perpetual Asia Income Fund, as well as Henderson Far East Income Fund all yield 6% to 7%. All three are of interest for 2019.

5. UK assets: a ‘Hotel California’

‘You can check out any time you like, But you can never leave!’

Don Henley’s lyrics from the Eagles’ 1977 album of the same name will resonate strongly in the UK, with many watching the seemingly interminable Brexit saga. You can leave in name but not in reality so you’re trapped, bad luck!

But is this true? Is Theresa May’s deal so bad and is the market right to conclude it’s a terrible deal with nothing to recommend it?

After all, if David Cameron had come back from meeting Jean-Claude Juncker from his roundly condemned (at the time) meeting in 2015 and said Monsieur Le President Juncker had agreed to Britain leaving the single market and customs union in 2020, leaving the common agricultural policy and common fisheries policy and stopping all payments to the EU from 2020 and banning free movement of people as soon as March 2019 the Brexiteers would have been doing cartwheels and people hanging out the bunting across the nation. Cameron
would have been proclaimed a national hero with immediate statue rights in every square in London. There would have been a rush to rename pubs The Lord CameronArms across the land and a bank holiday
in his name for eternity etched into the nation’s calendar.

For all the doubters and Jeremiahs Britain is scheduled to leave the European Union on 29 March 2019. The deal will be messy, certainly not perfect but workable and importantly from March 2019 onwards businesses will have certainty and ability to plan.

In the final analysis parliamentary democracy has a way of handling these things better than most and we suspect that people will look back in years to come and wonder what all the fuss was about. Like stock markets and most events in life, things are never as good as people hope or as bad as they fear.

UK assets themselves have performed exceptionally poorly, are undervalued and unloved and on anything other than a very short-term basis a strong BUY, in our view. For example, the iShare UK dividend ETF yields 5.9%. This compares to a Gilt yield of 1.5% and, we believe, is very cheap.

We expect it to do well in 2019.

6. Commodities: we like energy…

We believe energy stocks have the potential to recover strongly after a turbulent 2018. Global oil stocks have dividend yields of between 4% and 7% and these dividends will be well covered if the price of Brent Crude oil stabilises at US$50. Interestingly, energy’s weighting in the S&P 500 index has fallen to just 5.7% from
over 15% in 2008.

Market Cap Weightings S&P500

… and gold

We have long been optimistic on gold. Despite holdings of the yellow metal accounting for a lower percentage of central bank reserves than historically in the west, central bankers in emerging markets retain their commitment to gold as a store of wealth. Coincidentally, because growth prospects in this area are superior to those in the west, the percentage of central bank reserves held, relative to GDP, is higher.

The gold price is largely negatively correlated to the US dollar and the US stock market, which have, over the last three years, performed well. Any further setbacks in equity markets will be a positive for the gold price, in our view. All in all, we feel the yellow metal is a solid investment for 2019.

7. Inflation-based themes

It’s time to stop worrying about deflation. The most cyclically advanced of the major economies, the US, is already facing clear upward pressure on prices. Wage inflation is at a nine-year peak, job vacancies are high, and the unemployment rate is at a generational low. Transportation and freight costs are seeing upward pressure and US manufacturing surveys report raw material prices at seven-year highs. In Germany, the Bundesbank recently stated that “the period of wage moderation is over” unsurprising given that millions of German manufacturing and construction workers have secured 5% pay rises this year.

On top of these normal cyclical forces we are also facing a threat to the established order of trade agreements and tariff free trade. The scale of this is unknown at this stage but prioritising domestic jobs and interests will undoubtedly place upward pressure on prices.

Investment implications.

Higher than expected levels of inflation around the world, suggest a number of strategies.

We favour real assets over financial assets, we are buyers of commodities across the board, we are broadly short or underweight long-dated government bonds and we are overweight inflation linked bonds.

We are overweight property selectively.

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