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.
Institutional investor Caisse de dépôt et placement du Québec (CDPQ), which works primarily on behalf of pension funds and insurance plans, is opening a new fund dedicated to Québec businesses that specialize in AI, or artificial intelligence. Available funds are slated at US$ 250 million for the enterprise. The commercialization of AI seems to be a natural fit for CDPQ, “Since Montréal is emerging as a global beacon of excellence in artificial intelligence, we need to enhance our offering and ramp up the financial and development support we provide AI businesses through the various stages of their growth,” according to Executive Vice President of Quebec and Global Strategy, Charles Émond. Émond aspires to see AI spread throughout “all sectors of our economy.” The AI fund will be run by CDPQ’s Venture Capital and Technology team. They will look for companies that are already doing well in the sector.
Another program is targeting early stage organizations. Mila Quebec AI Institute, a research and development organization founded by three universities, is building a new complex to help facilitate CDPQ’s goals. The new complex will house early-stage AI companies. CDPQ is especially interested in companies that can accelerate their growth and enter markets quickly, providing speedy returns. There is a social component, whereby companies will be required to contribute to Mila. Michael Sabia, President and Chief Executive Officer of CDPQ, noted, “With this partnership, la Caisse is pursuing its commitment to helping Québec businesses in this new economy thrive and expand.”
Keywords: Caisse de depot et placement du Quebec
The Russian Direct Investment Fund (RDIF) and Glasgow-based Aggreko plc, a listed company that provides power, heating and cooling, signed a deal to cooperate on the development of microgrids. The parties plan to invest in the construction of facilities that will provide uninterrupted power supply and temperature control to industrial enterprises and utilities in the Russian regions. Aggreko operates one of its 6 global hubs in Tyumen, Western Siberia, through an entity called Aggreko Evraziya, OOO. In 2017, Aggreko plc acquired Younicos, a company specialized in the development of modular batteries and Microgrids control solutions.
The worst fears of the Federal Reserve may be coming true. The barbarous relic is once again offering some resistance to Fed policy as it maintains its uptrend from mid-November, and is being snapped up from central banks worldwide. Former Fed chairman Paul Volcker shared the central bank view that “Gold was the enemy.” If so, the enemy is gaining ground. China’s gold reserves quietly grew from December 2018 to February 2019. The People’s Bank of China disclosed in February 2019 that it increased its gold reserves by 10 tonnes that month, following purchases of 11.8 tonnes in January 2019, and 9.95 tonnes in December 2018. Goldman Sachs has listed central bank purchasing as the reason for the uptrend. Goldman Sachs expects to see gold at US$ 1,400 over the next six months, which would lift it well above its long-held resistance at US$ 1,350. China’s gold holdings are now US$ 79.5 billion. China, which is emphasizing diversification from the U.S. dollar, has been a fan of precious metals for years, and it has been encouraging its citizens to purchase gold and silver for a decade, when previous controls on precious metals were done away with. Now anyone in China can trade gold internationally with the swipe of a card.
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