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2019 investment outlook: Eurozone crisis and UK opportunities

17 December 2018

Gary Waite, Alpha: r² portfolio manager at Walker Crips, looks ahead to 2019 and outlines how the fund is positioning

Going into 2019 our primary concern is the Eurozone, where once again the structural flaws of the single currency are being exposed. The clash between the Italian government and Brussels over how much Rome should be allowed to borrow and spend could easily turn into a crisis: Italian spreads over German bunds are now above 300 basis points, close to danger levels.

The commitment of the European Central Bank – until now a ready buyer of Italian debt – to end quantitative easing at the end of this year looks to us to be very badly timed. Concerns surrounding Greece – and a possible fourth bailout – are also returning to the fore. The burst of European growth seen last year has petered out: even Germany contracted in the most recent quarter.

In terms of equities, we are overweight the UK, but defensively positioned. Whilst political events in recent weeks have increased the likelihood of a disorderly departure from the EU, any ensuing market sell-off is likely to be mitigated to a degree by the fact the UK is already the cheapest of the major developed markets. Many of the large-cap holdings within our portfolios act as a natural hedge: by reporting in dollars, any fall in the pound will see their share prices rise accordingly. We balance this position with some UK domestic exposure through the likes of the Merian UK Mid Cap fund, as we expect a rally in the event Parliament eventually agrees to a compromise deal.

In terms of overseas equities, we are underweight Europe. The small exposure that we do have to the continent is via the BlackRock European Equity Income fund, which naturally has a bias towards higher-quality, predominantly northern European companies. We currently favour the US and Japan over Asia and emerging markets. Concerns over interest rates confirm to us that our underweight position in fixed income is appropriate. However, within our fixed income allocation are some gilts holdings, which tend to perform well during flights to safety.

Our principal overweight is in alternatives, where we have our most defensive positioning. Gold usually performs well during volatile market periods; we have recently added the BlackRock Gold & General fund in this space. The absolute return sector has had a poor few years. However, there are some funds which have stood out from the rest: we have recently bought the Architas Diversified Real Assets fund, which has a track record of delivering solid returns in a variety of market environments.

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