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4Q19 Multi-Asset Outlook: Will consumers catch the global economy’s cold?

October 2019 
By Nanette Abuhoff Jacobson

Global growth is slowing and investors may want to consider defensive positioning.

Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

While the trade war has been dominating markets recently, I have little edge in predicting its near-term path and prefer to invest based on my views of the global economy, monetary policy, and valuations. I continue to incorporate trade-war uncertainty into my outlook by assuming its long-term impact will be to depress business investment. But my multi-asset views for the next 6 – 12 months are more directly tied to global manufacturing, which I think is in a recession, and the risk that consumers may not be immune. I think central banks will provide support but struggle to satisfy the market’s aggressive expectations. Weighing these inputs, I continue to recommend that investors consider positioning their portfolios with a defensive tilt. 

I favor a quality bias and prefer fixed income over equities. Among government bonds, I favor US Treasuries. Within credit, I prefer US investment grade, high yield, and securitized. I think spreads1 are reasonable and that duration2 could add to returns. While preferring credit to equities, within equities, I favor the US, which has the most resilient economy, and then Europe, where consumers are still fundamentally healthy and fiscal stimulus could stabilize the economy. I continue to prefer defensive factors, such as quality and safety, which can be found in a diverse range of traditional sectors. 


Global fundamentals are slowing

Looking at a wide range of leading economic indicators, I reiterate my belief that the global economy will continue to slow. The weakness is most apparent in the industrial economy (Figure 1), and I fear that the longer it goes on, the greater the chance of contagion to consumers. If the US administration implements Tranche 4 tariffs (focused on consumer goods), it could hurt US consumption, a relative bright spot globally, and slow the economy further. 

Nanette's multi-asset views


Change is from previous quarter. Views expressed have a 6 − 12 month horizon and are those of the author. Views are as of September 2019, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities.



Global growth is deteriorating

Global manufacturing purchasing managers’ index (PMI) and GDP-weighted M1 money supply3


GDP-weighted M1 money supply includes US, Europe, Japan, and China. | Sources: Bloomberg, Markit, Wellington Management | Chart data: July 1997 – August 2019. X-axis scale range is January 1998 to February 2020 due to M1 being forwarded 6 months. M1 data is from July 1997 to August 2019 (i.e., first data point represents July 1997 and final data point represents August 2019). PMI data is from January 1998 – August 2019.


As the US/China trade war drags on, I think more businesses will begin to assume that it is a structural conflict and that any deals between the sides are likely to be short-lived. The resulting uncertainty could curtail capital investment for several quarters to come. I expect central banks to ease materially in coming months, which will provide some support to markets, but not enough to match elevated expectations and broadly lift risk assets. 


Credit is relatively attractive versus equities

I find US credit appealing because I think spread valuations, which are not overly rich, and the potential for rates to fall could help credit outperform equities. Barring a recession, I am comfortable that the demand for income and yield combined with my moderately bullish view on rates will offset any near-term spread widening. I remain moderately bullish on US investment-grade credit because it provides long duration, and spreads are close to median levels. Although leverage has increased, companies are generating ample free cash flow and should be able to service their debts. 

I find US credit appealing because I think spread valuations, which are not overly rich, and the potential for rates to fall could help credit outperform equities.

I continue to be moderately bullish on US high yield as it tends to be tightly linked to the US economy, which appears better positioned than other economies. What’s more, spreads are reasonable, giving them at least some room to narrow. 

I am adding securitized assets to my credit universe because I think the sector provides investors a way of tapping into the relatively healthy US consumer and offers diversification, given the different structures and their multiple underlying borrowers. In my view, securitized assets also offer the potential for a persistent risk premium for complexity and illiquidity. In particular, I like housing assets, including non-agency mortgage-backed securities and securitized assets tied to multifamily affordable housing. I think they offer attractive spreads and could benefit from US housing tailwinds, such as a strong job market and low mortgage rates.


Country and regional equity fundamentals


I maintain my long-standing moderately bullish view on US equities. As noted, US consumers, while facing trade-related risks and a potential spike in oil prices, are still buoying the economy. Meanwhile, US manufacturing is bearing the brunt of the trade war, and until that uncertainty is lifted, we suspect it could weaken further (Figure 2) and eventually may impact the US consumer. 

US consumers, while facing trade-related risks and a potential spike in oil prices, are still buoying the economy.



Trade uncertainty weighs on US businesses

US Trade Policy Uncertainty Index and ISM Manufacturing Purchasing Managers’ Index (PMI)


Sources: Baker, Bloom & Davis, Institute for Supply Management, Bloomberg | Chart data: December 1995 – August 2019



I maintain my neutral stance on European equities as cheap valuations are being offset by weakening economic fundamentals. European manufacturing is in a recession, driven by Germany, and before it can bottom, the uncertainty relating to Brexit or the US/China trade war probably needs to subside. Consumers in Europe are well supported by a strong labor market, but they are at risk given the manufacturing recession (Figure 3). 



Can European consumers endure the slowdown?

European commission consumer confidence and Eurozone manufacturing PMI


Sources: Bloomberg, Wellington Management | Chart data: November 2000 – September 2019



Japanese economic indicators have been slowing, and I am still worried that the economy isn’t strong enough to handle the pending VAT (value-added tax) increase this month. In fact, Japan has never previously hiked the VAT during a time of economic weakness. Until there is more clarity on the cycle, I am maintaining my moderately bearish view. I am also concerned that the economy and stock market are dependent on softening in the yen, which I find unlikely given the currency’s role as a safe haven in times of stress. All of that said, I think the market is ripe for stock picking as few companies are covered by the sell side, and Japan remains an unpopular place to invest. But I prefer to avoid beta4 exposure until the global economy stabilizes or Japan’s domestic economy proves it can digest the VAT hike. 

Emerging markets

Emerging markets are most exposed to slowing trade and are the highest beta of the major equity markets. I continue to hold a moderately bearish view. China’s cycle appears to be somewhere between sideways and slowing, and the trade war could be a material drag. I favor equities in India and Brazil, and would avoid small, open Asian economies most exposed to trade. In local debt markets, a wide gap has opened between low- and high-yielding local debt. I prefer selected higher yielders such as Brazil, Russia, and Indonesia. Longer term, I think China and other regions may be attractive for investors with an extended time horizon and those with the risk tolerance necessary to add exposure amid a slowing global economy.


I maintain my neutral stance on commodities as growth is slowing and inflation is unlikely to rise much. Supply may be hampered by geopolitical events, but I think demand will be the greater determinant of commodity performance as growth weakens. I think precious metals could be a hedge against recession and find higher beta areas, such as industrial metals, less attractive. I continue to see a structural role for commodities as they are the only asset class that has historically had a high beta to changes in inflation. 


Risks are elevated… to the upside

I think upside risks in the current environment deserve more attention. We got a taste of this with the sharp snapback in risk assets on September 9 and 10: Value stocks rose 6% while momentum stocks fell 8.5%.5 The rerisking happened globally and across asset classes, with the worst-performing regions and sectors shooting higher and yields doing the same.

I think upside risks in the current environment deserve more attention. 

I think upside risks in the current environment deserve more attention. We got a taste of this with the sharp snapback in risk assets on September 9 and 10: Value stocks rose 6% while momentum stocks fell 8.5%.5 The rerisking happened globally and across asset classes, with the worst-performing regions and sectors shooting higher and yields doing the same.

I think this brief rotation was largely technical in nature given the low-beta exposure of most investors at the time. Looking ahead, the key to a sustained rotation into risk assets may be a significant de-escalation of trade tensions. President Trump could be motivated in this direction by his approval ratings on the US economy, which are key to his reelection prospects (Figure 4). 

That said, I am loath to base my investment views on a guess about the next trade-war announcement. In addition, China’s reaction to a proposed deal from Trump is a big wild card. Would China make concessions to reach a deal? That may depend on whether Chinese officials would prefer Trump or a Democrat in the White House in 2021.

As of this writing, more uncertainty was thrown into the mix with House Speaker Pelosi announcing a formal impeachment inquiry against President Trump. There is still a lot we don’t know, the process will take time, and a conviction by the Senate seems unlikely. However, higher political uncertainty and the potential increased probability of a progressive Democrat in office in 2021 present downside risk for equity markets, in my view.


Figure 4

Trump is vulnerable on the economy

President Trump’s approval rating on the economy
Approval – disapproval (%)


Source: Real Clear Politics, 9/19

Investment Implications 

Credit over equities — I prefer credit to equities on the basis of valuations, falling interest rates, and the potential for credit to outperform if the economy slows further. I am moderately bullish on US investment-grade and high-yield bonds, and I think securitized assets could offer diversification at attractive yields and exposure to the relatively healthy US consumer.

High-quality government bonds — Amid slowing growth and few signs of inflation, central banks are back on an easing path. Long-term US Treasuries look attractive.

Defensive factors and sectors — The safety and quality factors I favor may be found in sectors such as consumer staples, healthcare, telecom, and utilities.

Strategies for upside capture and downside mitigation — Call options6 can potentially provide attractive upside exposure to value-oriented sectors like banks. Precious metals could be an effective hedge against recession.

1 Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors. 

2  Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

3  Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. A reading above 50 signals economic expansion; below 50 signals contraction. M1 is a measure of the amount of currency circulating in the economy plus demand deposits.

4 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index

The Dow Jones US Thematic Market Neutral Momentum Index fell 8.43% while the Dow Jones US Thematic Market Neutral Value Index rose 6.09%.

6 A call option gives a buyer the right to buy a stock, bond, or other asset at a specific price within a set time period.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • Loans can be difficult to value and less liquid than other types of debt instrument; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments.  These risks may be greater for investments in emerging markets or in a particular geographic region or country. • Investments in the commodities market and the natural-resource industry may increase liquidity risk, volatility and risk of loss if adverse developments occur. Diversification does not ensure a profit or protect against a loss in a declining market.

The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

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