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Global recession seems inevitable

P3THE ECB HAS LITTLE

ROOM TO MOVE

P4REASONS GOLD CAN CONTINUE SHINING

P6OPPORTUNITY IN

UNLOVED US VALUE

T. Rowe Price's Ken Orchard explains why a deep global slowdown, or a minor recession, is likely unless the Fed acts aggressively (page 2)

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Ken OrchardT. Rowe Price

he global economy is in a tricky spot. Its two biggest players, the US and China,

are engaged in an on-again, off-again trade war that is slowing growth in both economies, aided by the lingering impact of past policy tightening.

Recent US PMI numbers were arguably the worst in ten years and growth in the eurozone has been sluggish for 18 months. A positive feedback loop is being formed between lower growth and weaker confidence, amplifying both.

The markets are emphatically telling the Federal Reserve a short, limited cutting cycle is insufficient to turn around growth. The problem is, when it comes to boosting global growth, all roads lead back to the Fed.

China is implementing some stimulus, but it is targeted and aimed at stabilising domestic growth – there is no appetite for another credit boom that would threaten stability. Meanwhile, the BoJ went 'all in' three years ago and the ECB has limited scope.

Recent experience suggests major economies only grow at reasonable rates when stimulus is applied, so the absence of

any candidate – other than the Fed – to apply stimulus is an issue. It seems likely growth and inflation will trend down until policymakers respond. A deep slowdown or minor recession feels inevitable. That said, a long and/or deep recession is unlikely, because the imbalances required to cause it are simply not there.

What happens next? Money markets are pricing in two possible scenarios, with two very different outcomes. First, a high probability of limited Fed easing, most likely comprising two more cuts. This would not be enough to kick start global growth. Second, a low probability of major Fed easing, with rates cut close to zero. This – combined with some limited fiscal stimulus from Europe and China – would be enough to refresh global growth.

Will the Fed get the message? If so, when? The situation will probably need to get worse. As such, it makes sense to remain long high-quality duration and maintain risk hedges. Eventually, history suggests the Fed will do what it needs to do. When this happens, it will present a great buying opportunity for corporate credit.

Global recession seems inevitable

rium Capital, the London-based alternative asset

manager, has brought quantitative investment group Sabre Fund Management into its multi-boutique structure.

Sabre, established in 1982, is one of Europe's longest-running hedge fund firms. Its award-winning Quantitative Equity Arbitrage Fund, managed by CIO Dan Jelicic since inception, has returned 166.6% since launch.

Alongside this pioneering strategy, Sabre also brings its successful Sabre Dynamic Equity Fund. Both strategies will be rebranded Sabre Trium and sit alongside Trium's existing offerings.

The move sees the ten-strong Sabre team move to Trium's London offices and combined AUM rise to $750m. Jelicic will continue to head the Sabre investment team. Melissa Hill, CEO of Sabre, will take on the newly-created role of head of quantitative strategies and will join the Trium executive committee.

Hill comments: "Trium is an innovative business and we are excited about the prospects we can capitalise on as a combined entity. We have known the principals for some time and are confident our business cultures are fully aligned.

"We are looking forward to being part of a bigger business that is able to move quickly to develop new ideas and reach new markets."

Trium Capital unveils tie-up with Sabre

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"Recent experience suggests major economies only grow at reasonable rates with stimulus"

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Jürgen OdeniusPGIM

Ken OrchardT. Rowe Price

Sébastien Galy Nordea

he ECB delivered a broad-based easing package in its

policy meeting, most notably a cut in the key policy rate deeper into negative territory and a resumption of asset purchases.

At €20bn per month, the scale of the purchases is relatively small, which is indicative of deep divisions. As expected, the ECB cut its inflation and growth forecasts, although its growth expectations remain rather

t the start of September, analysts were expecting

€30bn of bond purchases per month, but then the hawks began pushing back. As a consequence, expectations were drawn down to €20bn a month – which was the move the ECB made.

Overall, it was a strong policy package on the last meeting under Mario Draghi – who has done a tremendous amount of good work for the eurozone.

he ECB's actions were not a surprise. Given growth is

sluggish and inflation is low, it was the right thing to ease, and a 10bps cut leaves it with the space to cut further if it wants.

However, when it comes down to it, the ECB has very limited policy space. Its own analysis suggests if it cuts too much it may have a very negative impact on banks. However, over the past six months, the market has forgotten

optimistic in our view.Headline inflation is now

seen averaging 1.2% this year, down from 1.3%, and only 1% in 2020 – substantially below the earlier 1.4% forecast. Real growth forecasts were only marginally cut to 1.1% this year and 1.2% next year, just 0.2 percentage points below the ECB’s earlier forecast.

By contrast, we expect the economy to remain sluggish, with real growth of 0.8% next year.

In peripheral countries, we expect this credit risk to disappear. Lower rates will be positive for government and private enterprise six to 18 months down the road.

Will Italy achieve the same growth as Spain? Unlikely, as it has many issues. As for Greece, it is far more likely to see decent growth. There will be a lot of opportunities from a fixed income point of view.

this and has become much more enthusiastic about the idea of easing. I do not think the ECB’s view on the matter has changed – it knows it has very limited room to manoeuvre.

Cuts of 10bps or 20bps might make a difference, at the margin, but will not have a huge impact. The market is pricing in easing of about 40-50bps over the next couple of years, but I do not think the ECB will cut this much.

"The ECB cut its growth forecast, although it remains rather optimistic"

"Mario Draghi has done a tremendous amount of good work for the eurozone"

"Given growth is sluggish and inflation is low, it was the right thing to ease"

Divided ECB has little scope to manoeuvre

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Vincent RopersWise

old has been on a tear since the beginning of May. This reflects

the market shifting towards expectations of a prolonged global growth slowdown, possibly leading to a recession.

We see a number of good reasons why gold can continue to climb higher. Firstly, gold is considered a safe harbour for investors amid gathering market storms. Often, investors might opt for government bonds over gold, as they carry interest payments. However, as we see global bond yields declining in reflection of a gloomier growth backdrop, gold becomes more attractive on a relative basis.

Also, gold is a classic inflation hedge. In times of uncertainty, gold is considered impervious to the actions of centralised institutions. As unprecedented levels of QE have flooded global markets with hot money, asset prices have risen, but so has the potential for a sharp inflation rise.

Thirdly, although central bankers have been buying gold at record levels in recent months, it remains underowned by private investors and institutions. If there was a further extension in the rally, it is not difficult to envisage short positions beginning to be unwound and the wider market going long on the metal.

We also had technical breakout when the price recently passed through about $1380. This milestone could also support the extension of a prolonged rally.

Finally, as investors, we seek to unearth asset classes we believe have the potential to perform well and offer some downside protection. Thus, instead of just tracking the gold price, which will without a doubt remain volatile, we prefer accessing undervalued gold-related assets. We have more than 6% of our portfolio exposed to gold and gold miners. We believe there is a strong case for holding gold as part of a liquid, mixed asset portfolio.

Reasons gold can keep on shining

ayfair Capital, a member of Swiss Life

Asset Managers, has acquired the Bonhill Building in central London for £112.5m. This marks the specialist UK real estate investment manager's largest acquisition to date.

Located in the heart of the vibrant submarket of Shoreditch, the property shows a net initial yield of approximately 5% and displays attractive long-term rental growth opportunity.

The Bonhill Building benefits from proximity to the traditional City core, as well as the Old Street 'Silicon Roundabout'. It is also a short distance from the new Elizabeth Line stations at Moorgate and Liverpool Street. Moreover, the Bonhill Building is well positioned to benefit from growing interest in the tech belt surrounding the City’s northern fringe.

Giles King, fund manager at Mayfair Capital, says: "The Bonhill Building meets a number of our thematic criteria – tech connectivity, transport infrastructure, clustering of tech businesses and wellness. Along with an attractive yield of 5%, we see potential for further growth in the office rents.

"The acquisition case was strengthened by our expectation London will remain a popular destination for talent and occupiers regardless of the Brexit outcome."

Mayfair Capital makes largest ever acquisition

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"There is a strong case for holding gold as part of a mixed asset portfolio"

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Jacob MitchellAntipodes

Neville WhiteEdenTree

he US Fed began the process of shrinking its balance sheet at the end

of 2017 and will continue on this path until December.

Despite the recent dovish behaviour of the Fed and other central banks, balance sheets have contracted 3% over the last year. Liquidity is being sucked out of the system and this is being led by the Fed. Pairing this with recent soft US manufacturing and industrial production data, are conditions too tight and is the Fed making a policy error?

In addition to monetary policy, we also remain troubled about the broad deterioration of corporate credit. While the stock of outstanding debt is high in an absolute sense, the growth in non-investment grade

his year marks the 45th anniversary of a piece of UK legislation that

represented a sea change in safety at work.

The 1974 Health and Safety at Work Act continues to define the fundamental structure and authority for the regulation and enforcement of UK workplace safety, health and welfare. The importance of the legislation and its impact on safety cannot be overemphasised. The Act secures the health, safety and welfare of any person in the workplace, protecting staff, guests, visitors and contractors alike.

There were on average 700 workplace deaths every year in 1974. The 85% reduction since then is a major achievement, together with the rate of non-

credit is the particular concern. Worryingly, the growth in lower quality debt has occurred in weaker businesses that are increasingly under the threat of disruption. Companies have used low interest rates to take on debt, buy back stock and pay dividends, rather than invest.

While global stocks have rallied this year, risks are building. On top of tightening and credit excesses, we still have to contend with trade war fears, European political instability and a bubble in growth stocks.

Like a Jenga tower, while we may not be able to pinpoint the precise moment of collapse, we can observe building instability. Price action in Q4 2018 reminds of what can happen when such risks come back to the fore.

fatal injuries at work falling by more than half since 2000.

Where more work is needed is in the more invisible aspects of workplace health. 44% of all work-related ill health is linked to stress, depression and anxiety – with 57% of all 'lost-days' due to these conditions. Over time, these statistics have remained stubbornly flat. 595,000 workers suffered work-related stress or anxiety in 2017-18, with 239,000 new cases reported.

The cost in human suffering from work-related mental ill-health is still a novel issue, but encouragingly, we are seeing more companies developing a mental health and wellbeing strategy. This is something we strongly endorse and look for in our engagement with companies.

Instability is building

Work safety milestone

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Raj Shant joins PGIM affiliate Jennison

"Liquidity is being sucked out of the system"

"Companies are developing mental health strategies"

aj Shant has joined Jennison Associates, the

fundamental active equity and fixed income affiliate of PGIM.

Part of Jennison’s continued efforts to grow its European institutional footprint, Shant will expand the group's European relationship platform.

Shant was previously head of European equities at Newton. In addition to three decades of investment experience, Shant brings a proven ability to build strong relationships – with his last five years at Newton spent in a client-facing role.

Founded 50 years ago, Jennison Associates was one of the first boutiques to become an affiliate of PGIM, the $1.3trn global investment management business of Prudential Financial Inc.

Peter Clark, managing director and head of product and strategy at Jennison, says: "We are excited to build out the success of Jennison's truly active, fundamentals-based investing model in Europe. The flagship strategies have already been successful with US and international investors, but there is potential for growth across the Atlantic.

"Raj's entrepreneurial nature and familiarity with the multi-boutique structure make him an excellent choice for further leveraging the PGIM scale and pursuing the growth of our European institutional client base."

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Andrew BeckNordea

he continued plight of the 'value' style of investing relative to 'growth' has

been well documented, but what many market participants may be underappreciating is the sheer length of this era of underperformance.

In the US, value has lagged relative to growth since 2006, which is by far the longest period on record. In comparison, the second lengthiest phase of underperformance for value was almost half this duration – between 1993 and 2000. The key driver of growth stock outperformance has been the weak economic growth witnessed during the current expansion – which is also at record length.

As long as growth remains scarce, it is unlikely the value style can regain the ascendency. However, there is only so long investors can continue to ignore today’s valuation gap – with growth stocks trading at multiples significantly wider than value counterparts. This is true across the entire market cap spectrum.

While valuations are still below historical extremes, such as during the TMT bubble, we are highly unlikely to be still talking about a growth dominance in the coming years. Speaking of the dot.com boom and bust, I was a portfolio manager during this period and it helped form my philosophy. I fundamentally believe the price you pay for any investment is crucial – as critical as any other metric. Therefore,

the margin of safety associated with value investing gives me the peace of mind required to invest the savings of our clients.

However, as is the case with all value investors, it is important to have a rigorous process in order to avoid value traps. Our proprietary Absolute Value® approach is explicitly designed to avoid these, by focusing on high-quality companies trading at attractive discounts to intrinsic value.

It is also imperative to have a structured sell discipline that avoids averaging down on losing positions – which is a critical flaw in the approach of many value investors. As a result, our style yields an attractive combination of value, quality – as well as growth – characteristics.

While value stocks have been unloved for some time, we see numerous compelling

Opportunity in unloved value

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opportunities – particularly within the industrials, communication services and technology sectors. A tech overweight may be surprising for a value-biased investor, but not all tech stocks are priced at extreme multiples like the FAANGs – with many mature, high-quality companies trading at reasonable discounts.

Within industrials, we are focused on business service providers and distributors – rather than the more cyclical manufacturers. On the flipside, we are negative on small-cap US banks, which face major secular headwinds.

At market cap level, the value sweet spot is in stocks with a market cap of $10bn or less. We consistently unearth undiscovered value in this area. In addition, the valuation of small caps relative to large caps is at the most attractive level in years.

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"Value has lagged relative to growth since 2006, which is by far the longest period on record"