Spotlight on: The view from the buy side for 2019
We hear from expert investors Chantal Brennan, research director at Davy Asset Management, and Matthieu Rolin, portfolio manager at Aviva Investors France, who outline the key trends over the past year and give us a glimpse into what 2019 holds from a buy-side perspective.
What was your main focus during 2018?
Chantal Brennan: Our main focus in 2018 was on adapting to the changes brought about by Mifid II. The introduction of this regulation has resulted in investors having greater direct engagement with companies. As a result, it would seem firms will need to build out their IR teams to cope with the increase in demand for contact with investors.
Matthieu Rolin: For me, the main focus in 2018 turned out to be the trade war launched by US President Donald Trump and the consequences at the macro and micro levels. At a macro level, it put pressure on international trade and growth rates and, at a micro level, companies had to deal with more uncertainties affecting their investment decisions. They also had to absorb those tariffs – not an easy task when other costs are also rising.
What macroeconomic issues have most affected your investment decisions last year?
MR: The return of inflation and the unemployment situation in the US were two important factors I’ve taken into account in my investment decisions. The very tight labor market was a problem in some states where the unemployment rate was too low and companies couldn’t find workers. It also put pressure on wages, contributing to general inflation. Another consideration was the energy price increase and tariff imposed by Trump on imported goods that further weighed on companies’ P&L. The focus was on companies that have the ability to pass those cost increases through to their customers.
CB: We focus on building portfolios from the bottom up and, while macroeconomic issues aren’t one of the key drivers affecting investment decisions, they have resulted in stocks in Asia and in certain sectors being negatively affected by sentiment surrounding trade tariffs. We have used this weakness as an opportunity to gain exposure.
What did you find most challenging during 2018?
CB: The main challenge in 2018 stemmed largely from the impact of Mifid II. From an investment perspective, finding alternative information sources from which to research companies has been harder, particularly for smaller companies.
MR: Political uncertainty was one of the most challenging elements in 2018. Both the US and Europe, for different reasons, have been a source of volatility. The lack of visibility regarding the trade war Trump started the US’ main commercial partners has generated volatility in the market, as did the mid-term elections. On the other side of the Atlantic, Italian elections and Brexit were the main sources of concern.
What are the main themes on your mind for 2019?
MR: In 2019, we will keep an eye on a few topics. Firstly, US monetary tightening by the Fed, as well as by the European Central Bank. The market is pretty skeptical with regards to Fed fund rate increases, even if there is room for more. If the economy softens, the Fed will have to change the pace of rate increases.
Political and geopolitical developments will also be a focus. Tensions are high around the globe, for example in North Korea, Russia-Ukraine and China, and any escalation in a major conflict will have a negative impact on the markets. The resolution of the trade war between the US and its major commercial partners is another issue. The main conflict is with China, and we can expect a compromise to be found in order for global trade and global growth to keep up at the current rate.
Finally, China’s economic slowdown is a concern. But if we look back in recent history, the Chinese authorities have always responded to an economic slowdown with stimulus measures. We can most likely expect history to repeat itself if things deteriorate too much.
CB: There are a few issues on the horizon for this year. The main 2019 themes on my mind include ESG, Asian equities and active vs passive investing.
Going into 2019, is there anything you’d like to see IROs doing differently?
CB: ESG will remain a key topic. As a result, improving ESG disclosure levels and increasing familiarity with the various ESG rating agencies should be near the top of every IRO’s plans for 2019.
MR: SRI/ESG considerations are of increasing importance to investors and their decisions, and IROs should be looking at providing the investment community with more information regarding these topics. IROs could also be more proactive in their communications with investors and focus more on maintaining relationships with investors they meet. It’s often a pity we don’t receive more updates from these companies.