I have some time – about an hour or two – to jot these predictions down as I gaze upon a new year and delicious Martinelli’s apple cider with my family. 2018 was a super busy year for me. In the Summer of 2018, Canadian pensions and other asset owners sold down chunky positions in global equities, while stocking up on cash and other forms of liquidity. Here are some of my bold predictions for 2019. These are of my opinion – and don’t forget to listen to my podcast at FollowtheMoneyShow.com.
QT Fed and the Stock Market
Fed Chairman Jerome Powell will most likely continue to lift interest rates despite pressure from U.S. President Trump in order to pay for the massive QE measures and credit boom stemming from 2008. The U.S. stock market and American wage growth would have to tank dramatically further for Powell to take a pause. I predict Powell will stick with two interest rate raises for 2019. Institutional investors, 401k plans, small business owners, and CFOs aren’t prepared for a QT world. Credit card and online lending rates will increase or continue to cut access in 2019. There will be pain for solo-entrepreneurs. As the tide recedes, more ponzi-scheme and fraudulent financial firms will be revealed, bringing investor soreness in 2019. It will be a great time to be a lawyer.
Sovereign Wealth Fund Growth Slows Down
Sovereign fund asset growth will slow down in 2019, as the price of oil trends lower and Chinese and other Asian export growth tremors. There is a slight chance sovereign wealth fund assets could reach US$ 9 trillion once 2020 starts. Sovereign funds will be loving more value-add U.S. real estate in 2019 – think data centers and senior housing.
Asset Managers – Be Sold or Die
More asset management firms stuck in the middle and have low-brand awareness will wither away, as ETFs/smart beta indices continue to erode market share. Larger investment houses will continue to gobble up “nameless” asset management firms, mostly for their assets, not capabilities as marketed in press releases. Who knows, maybe Franklin Templeton will merge with Invesco, or AQR be sold off to Principal Financial Group in 2019? Expect way more non-activist hedge fund redemptions from U.S. pension plans in 2019, as these hedge funds will have to rely more on shorter-term family offices.
Risk Parity Blues, Hello Multi-Strategies and Conviction Equity
Pensions that got sold on risk parity have a major sour taste in their mouths – only a few firms can really pull off the strategy. AQR Capital Management’s main risk parity mutual fund even rebranded from the AQR Risk Parity Fund to the AQR Multi-Asset Fund. Multi-asset strategies will continue to gain popularity, especially in Asia and Latin America. U.S. pensions will shift out of more risk parity strategies toward smart beta indices and high-conviction equity or activist plays. Beta-focused institutional investors will experience the surf wave winding down.
Leash of Venture Capital and Startup Fractures
Sovereign wealth funds will remain a strong base for venture capital, probably a lot less than in 2018, but nonetheless, a key factor for companies wanting to stay private longer. Startup winners for 2019 will be subscription-based software companies, while some unicorns will lose their horns. There will be a number of popular startups shutting down, as some family offices and funds will need cash – we saw this with Blippar and other startups that can’t be profitable in a shorter time frame. SoftBank’s Vision Fund will be under greater scrutiny in 2019, as investments will be under tighter financial pressures from its limited partners. How will Katerra, WeWork, and Nvidia, pan out in a QT America?
Political Parties Shift (Europe, U.S., and China)
Populist and nationalist voting blocs in Europe and Asia will gain more momentum driven by income inequality and immigration policies; however, governing multiple constituencies will be challenging and may decrease popularity in nationalist movements. In Europe, what was once-considered center right-wing is now center left-wing, the Macron-Merkel coalition of Europe faces fragmentation, as the European economy grinds slower and political upsets disturb the powers that be. Asset owner capital will prefer real estate office and logistic investments in Europe in 2019. Democrats in the House, led by Nancy Pelosi, have a choice to make in order to pursue paths to take out President Trump and ushering in Pence or work with Trump on infrastructure and renewable energy. Perilous political winds and passionate attitudes on social media show a non-working approach. Neo-conservatism and the hawkish wing of the Republican party continues to lose influence from the base, while the Left embraces more identity politics, man vs. woman, race, etc., challenging business-friendly liberalism. For 2019, with a divided Congress, expect little in U.S. fiscal policy changes. With regard to China, expect more infighting (more arrests) from the various coalitions in the Chinese Communist Party (CCP) stemming from stress from the trade wars, next generational leadership, cracks in China’s shadow banking system, and changes in the military industry complex.
And there you have it, I look forward to a wonderful 2019.
The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
Qatar Sheikh Tamim bin Hamad Al Thani appeared at an Arab economic summit and it was revealed that Qatar plans to purchase US$ 500 million of Lebanese government bonds. Earlier, there was speculation Qatar was going to deposit US$ 1 billion in Banque du Liban (Bank of Lebanon), which was never confirmed by the bank.
Lebanese officials in January revealed the possibility of a debt restructuring. The International Monetary Fund calculated that public debt in Lebanon is at over 160% of gross domestic product this year and could raise to around 180% by 2023.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Recep Tayyip Erdoğan, the President of Turkey, has a new reform to jump start the consumer debt-laden economy, and it involves Turkey’s sovereign wealth fund. His strategy is to offer money to those facing overwhelming credit card debt. Ziraat Bank (Türkiye Cumhuriyeti Ziraat Bankası) will allow borrowers to apply for debt rescheduling and secure lower interest rates. Erdogan announced that “Any retail client from any bank can apply.” Credit card debt is a monstrous problem in the country. Consumer credit has exploded due to low rates, government assistance, and easy credit availability. Last summer, non-housing debt reached US$ 97 billion. Half of this is credit card debt. Over US$ 30 million is non-performing. The debt was accumulated in foreign currencies, because they used to provide the lowest interest rates. Unfortunately, as the Turkish lira’s exchange rate cratered, much of the debt became impossible to service. The lira is among the world’s weakest currencies. Erdogan expects a smooth transition, “They will pay off their debt with a loan from Ziraat, and will pay it back according to the level of their monthly earnings.” Ziraat Bank is managed by Turkey’s sovereign wealth fund, which is chaired by President Erdoğan.
[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Investec Structured Property Finance, part of Investec, provided a £107 million loan to a South African investor being represented by London-based Pembrey Asset Management Ltd to acquire an office in London at One Bartholomew Lane. The Korea Investment Corporation (KIC) is the ultimate owner of the office and is selling it through Hines UK, part of Hines. BNP Paribas Real Estate acted on behalf of Pembrey Asset Management and CBRE acted on behalf of Hines.
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