2019 is shaping up to be a 'horrible year' for the market - here's a $64 billion investor's game plan to avoid big losses
- Markets are undergoing various transitions that make volatility very likely in 2019, according to Suzanne Hutchins, the global investment manager at $64 billion Newton Investment Management, BNY Mellon's thematic investment boutique.
- These transitions include the withdrawal of central bank liquidity and rising interest rates.
- In an interview with Business Insider, she explained how her fund is carrying out a capital preservation strategy that would limit losses in 2019.
By one measure, 2018 was the worst year to profit from financial markets since the turn of the last century.
If it ended mid-November, this year would have produced the highest share of global assets with a negative return since 1901, according to data compiled by Deutsche Bank. There were few places to hide as even the most defensive equity sectors sold off at some point during the year, and as bond prices unusually fell alongside stocks.
There's little evidence that the market's woes are going to be resolved soon. Interest rates are rising, central banks are withdrawing their liquidity injections, and the trade war is raging.
These ongoing risks have prompted a capital-preservation stance at Newton Investment Management, BNY Mellon's thematic investment boutique that oversees £50.8 billion ($64.2 billion) in assets.
"I would describe next year as the Queen described it - as a year of annus horribilis," Suzanne Hutchins, the global investment manager, said in a recent phone interview from London. She was referring to the Latin phrase that means "horrible year."
"It's going to be very challenging moving into next year because we're at the cusp of many turning points. And certainly, the volatility that we saw in February of 2018 will continue."
Hutchins is a co-portfolio manager of Newton's Real Return strategy that aims to deliver positive returns for clients over the long term regardless of market conditions. But heading into 2019, she's focused on making sure that the portfolio is watertight.
Her strategy is a combination of do's and don'ts.
"You want companies that haven't got very much debt and you want companies that will grow irrespective of what the economy is doing," Hutchins said. "And that tends to be in areas like healthcare, pharmaceuticals. It tends to be in some areas of technology."
Within technology, Hutchins is betting on companies that are growing and cash-rich, but don't necessarily have the same allure as the FAANG stocks. In fact, she's avoiding this cohort of companies because their valuations are "very rich."
Cisco and Microsoft are two examples of tech companies that are growing but don't have the flashiest businesses in tech, she said.
Her portfolio also favors companies that benefit from green energy. The growth of sustainable energy is one of her long-term secular bets, and companies that are involved in this arena create investable opportunities as more people think about climate change, she said.
The Real Return strategy is not tethered to any particular asset class and has the flexibility to invest in whatever ensures the strongest returns. This freedom is reflected in her fund's strategy for hedging against painful losses in the market.
"Some gold in your portfolio is always a good hedge," Hutchins said.
The precious metal has had a mediocre year like many other asset classes, down 4% from January 1 through Wednesday. Still, Hutchins recommends it as a hedge against unforeseen geopolitical shock, noting that individuals can purchase gold through an exchange-traded commodity fund.
She further advised that investors diversify their portfolios with bonds.
"In the US, you might not think US Treasurys look attractive," Hutchins said. "But I have to say they're very, very attractive to non-US investors. Other bond markets like Australia and New Zealand are attractive - less so to perhaps the US investor. But with their close proximity to China and if China is slowing down, then the Australia and New Zealand bond markets should do quite well."