Depth report

　　

Looking back on 2018, it can be said that it is very appropriate to use "Lost 2018" to describe the mood of investors. Globally, most asset classes have not received positive returns in the past year, and the prices of risky assets have generally fallen. There are almost no exceptions for the stock indexes of major countries and regions such as the United States and the Eurozone, commodities such as crude oil and copper, and emerging market currencies. China's A-shares fell by nearly 30% last year, and it can be said to be the world's largest decliner among major assets. Global hedge funds among alternative assets fell only slightly throughout the year, and global real estate investment trusts fell 4.7%. Compared with traditional assets, alternative assets performed relatively stable.

    It is worth pointing out that under the circumstances of increasing downward pressure on China's economy and loosening of monetary policy, China's interest rate bonds have experienced a bull market, with a full-year return of 9.2%, which is the best performer among the few assets in the world with positive returns. Ok.

    In contrast to the overall dismal performance of the capital market, the global economic growth in 2018 appears to be relatively stable, and may achieve a growth rate of 3.7% similar to that in 2017. We believe that the performance of the capital market in 2018 is more a reflection of investors' concerns about economic growth prospects.

    Looking ahead to 2019, we believe that the global macroeconomic and investment environment will face greater challenges and risks compared to 2018:

    The first challenge: When will the US economy enter a recession? This will be one of the biggest concerns or challenges of the market in 2019, related to global economic growth, global asset performance, and capital flows.

    Since June 2009, this round of US economic expansion has lasted for more than 9 years, making it the second longest expansion cycle since 1858. This "ultra-long" American economic cycle benefited from Trump's fiscal stimulus policies. There is currently no strong data showing that the US economic recession is coming. Taking into account the inevitability of the business cycle, the recession may be postponed, but will not be absent, as well as the fading effect of tax cuts and tightening of financial conditions, the U.S. economy may decelerate significantly in the second half of 2019, and the market is facing a recession in the U.S. economy The speculation may be further improved. There is a certain possibility that the US economic recession will occur in 2020.

    The second challenge: The economic growth of most countries has declined simultaneously in 2019, and the economic growth of developed countries has declined more significantly than that of emerging market countries.

    The peak of the economic growth momentum of the major countries has passed, and it has entered the late stage of the economic cycle more deeply. The output gap in the United States and the Eurozone will narrow, becoming a major drag on global economic growth. Correspondingly, the pressure faced by some emerging market countries may be partially eased. The overall growth rate is expected to slow down slightly in 2019. However, the economic growth difference between emerging economies will still be very obvious, and the economic fundamentals will be weak. Emerging countries will still face greater economic growth and uncertainty in the value of their currencies. China's economic growth rate will continue to slow down. The outlook for external demand in 2019 is not optimistic. The early import and export "run-up" will bring negative effects. The probability of real estate investment growth will fall and the consumption of residents who are suppressed by high housing prices are not optimistic , Although fiscal and monetary policies will be further relaxed, the downward trend in the economy is difficult to reverse.

    We predict that the economic growth rate of the United States and the Eurozone will drop from 2.9% and 1.9% in 2018 to around 2.4% and 1.6%, respectively, and that China's economic growth rate will drop from 6.6% to around 6.3%. The global economic growth rate will decline to around 3.6%.

    The third challenge: the decrease in the net liquidity injection of major central banks. As the Fed continues to shrink its balance sheet and the European Central Bank ends its asset purchase plan, the net liquidity injection of major central banks into the market will be significantly reduced in 2019, and even an inflection point will appear, which will become a risk point for the market.

    Since the financial crisis, the substantial increase in global risk asset prices is partly due to the "liquidity feast" brought by major central banks. Since 2008, the "quantitative easing" of the four central banks, namely the Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England, has injected about 9 trillion US dollars of liquidity into the market. Through the currency derivation function of commercial banks, a larger amount of funds flowed into the real economy to stimulate economic recovery, and flowed into the capital market to increase the prices of various assets. At the same time, quantitative easing in developed countries has also produced significant spillover effects. A large amount of funds flowed into emerging markets in the form of short-term investments, equity and debt, which promoted the prosperity of the economy and capital markets in emerging markets. The tightening of the monetary policies of major central banks means that the market’s liquidity environment is tightening, which may have the opposite effect to asset prices in developed and emerging markets.

    The fourth challenge: the slowdown in global corporate earnings growth. In the late stage of the economic cycle, the profitability of enterprises will also decline, which is not only the problem of economic downturn, but also micro-factors such as rising wage levels and rising raw material costs. The profit growth rate of the MSCI global stock index began to decline from the second quarter of 2018. This trend may continue into the fourth quarter of 2019. The profit growth rate of the S&P 500 may decline from 21% in 2018 to 10% in 2019. The Shanghai Composite Index The profit growth rate of the company may decline from 6% to around 0%. For the stock market, corporate profitability is one of the most critical factors in determining stock prices, especially in the context of the current gradual tightening of liquidity, it is difficult for stock market investors to be optimistic.

    The fifth challenge: The valuation of stocks and bonds is generally at a high level, especially relative to the performance of the real economy. Since the end of 2009, the return of U.S. stocks has exceeded 200%, and the return of the MSCI Global Index has also exceeded 100%. Some developed countries’ high-yield bonds also have returns close to 100%, but the US nominal GDP and global nominal GDP have only risen by about 30%. The increase in equity and debt assets far exceeds that of the real economy. Of course, China is a special case, and the return on A-shares is far inferior to China's economic growth.

    Under these challenges and potential economic policies, geopolitical conflicts, trade wars, multinational elections and many other risks, we recommend:

    First, slightly lower the allocation of developed stock markets, and slightly increase the allocation of emerging market stocks. The key words of global stock and bond market investment strategies in 2019 are "cautious" and "seizing structural opportunities." The overall downside risks of major developed countries' stock markets are greater than the upside possibilities. At present, the stock markets in developed countries are relatively expensive as a whole. The allocation strategy in 2019 needs to be adjusted to increase the relative weight of defensive sectors. In contrast, emerging market stock markets may outperform developed countries' stock markets due to slower Fed rate hikes, good economic growth, and lower valuations. The global economic downturn and reduced inflationary pressures in 2019 are conducive to the rise in the prices of US, German, UK and Chinese government bonds. However, compared with the stock market, the bond prices of European and American countries are on the high side, and major central banks are gradually tightening monetary policies. This is a big negative factor, and it is necessary to find structural opportunities in the bond market. Optimistic about China's interest rate bonds and high-rated credit bonds.

    Second, increase the allocation ratio of A-shares, and increase the allocation ratio of China's interest rate bonds and high-rated credit bonds. For China's asset market, the valuation of A shares has returned to the level at the end of 2014, and the value of its long-term allocation has increased. At the same time, with the relaxation of China's monetary policy, China's interest rate bonds and high-rated credit bonds also have room for investment.

    Third, the investment value of alternative assets has increased significantly in 2019. In the next few years, the world will enter a relatively slow growth phase, accompanied by the shift from loose to tight global central banks, the decline in corporate profit growth, and the rise of populism. In this macro environment, although we believe that in the next five years, most asset classes, including traditional stocks, bonds, commodities and private equity, real estate, etc., will have a decline in return, but relatively speaking, the global scope Internally, alternative assets will get better mid- and long-term returns than equity bonds.

    Finally, the characteristics of low correlation with traditional asset returns will help alternative assets avoid some of the potentially elevated public market risks. In 2018, the volatility of traditional assets increased significantly. The volatility of global stock markets reached 80% of the historical level at the end of the year, and the volatility of bulk commodities reached the 84% of the historical level at the end of the year. In 2019, with economic growth slowing, stock and bond valuations high, and political policy risk points numerous, we expect that the volatility of the public market will be at a high level. Since alternative assets such as private equity, real estate, hedge funds, and private equity loans often have less correlation with the returns of traditional assets traded on the open market, the inclusion of alternative assets in the asset allocation portfolio helps to improve the stability of asset portfolio returns and reduce The overall risk of the entire asset portfolio. In particular, income-based alternative assets such as private equity and real estate can also help increase the overall return of the asset portfolio.

    At present, major countries are in the late stage of the economic cycle, and the possibility of economic recession in individual countries in the next few years is increasing. In the context of uncertainty, alternative assets with long-term investment properties and alternative assets with little correlation with cyclical fluctuations can help the overall asset portfolio to better resist short-term market fluctuations. From the perspective of historical performance, alternative assets such as private equity, real estate private equity funds, hedge funds or private equity loans performed better than traditional assets such as the stock market in the late stages of the economic cycle and economic recession.

    Investing in alternative assets, fund managers are very important, and we particularly emphasize this point. The performance of alternative asset fund managers varies greatly. Good alternative asset managers have significantly higher returns, and the performance of poor managers is even lower than that of the traditional bond market. According to KKR's survey data, the return on investment of the top 25% of alternative asset fund managers is significantly higher than the average performance of similar asset fund managers, and it is significantly higher than the performance of the bottom 25% of managers. As far as traditional assets are concerned, the performance of fund managers is closer. Choosing an excellent fund manager is one of the important considerations for investing in alternative assets.

    Recommend high-net-worth investors to invest in alternative assets by means of funds of funds. Invest in funds of funds that can help investors enter the top 1/4 quintile of excellent funds. The advantage of the fund of funds is that it can help investors reduce the concentration risk, thereby smoothing the probability of loss caused by the fluctuation of a single fund. Professional funds of funds can formulate scientific long-term asset allocation strategies and optimize them more effectively than individual investors, and reduce the premium space caused by the mismatch of capital and asset maturity and lost time due to individual pursuit of short-term liquidity.

    Specific to the broad categories of assets, our 2019 investment strategy views are summarized as follows:

    Domestic private equity: valuation adjustments in the primary market bring investment opportunities for high-quality assets; focus on new economic industries, medical health, new consumption and other fields driven by re-technology; continue to use second-hand share strategies.

    Overseas private equity: Focus on funds with differentiated competitive advantages, such as small and medium-sized market and industry expert funds; selectively invest in special circumstances and non-performing asset funds. Construct a diversified investment portfolio and increase the allocation of co-investment and second-hand shares.

    Capital market: The market is expected to have high volatility and uncertainty in 2019, and the optimization of strategic allocation highlights the main. It can be expected that the stock Alpha strategy will perform better. The CTA strategy has more opportunities to be appropriately configured. The performance of domestic interest rate bonds is relatively optimistic, but the credit bond market should still be cautious. Increasing the allocation of overseas cash and short-term fixed income can capture the additional returns brought about by the rise in short-term interest rates of the US dollar interest rate hike, as well as its high liquidity and low volatility characteristics.

    Global real estate: focus on value investment, focus on the upgrading of Asia-Pacific cities, key cities in developed countries, focus on office buildings and modern logistics, grasp the structural opportunities of the new economy and urban renewal, and actively manage to increase value and create benefits through fund management.

    Domestic fixed income: Deploying a new economy is the key word for domestic fixed income investment in 2019. Investors should enhance their risk awareness, follow the principle of scientific decentralization, and grasp opportunities in policy-oriented fields such as smart agriculture, consumer finance, and support for small, medium and micro enterprises, in order to obtain steady returns.

    Overseas private equity credit: Uncertainty in the market is rising, and the anti-cyclical advantages of private equity credit are particularly prominent. The more attractive risk-adjusted returns continue to be favored by investors. It is recommended to select fund managers with strong risk control capabilities. Except for North America and Europe, it is recommended to focus on emerging markets.

    Insurance: With the increasing impact of new asset management regulations and the gradual advancement of tax-deferred pension policies, pension planning has received more and more attention. It is recommended to strengthen the configuration of annuity insurance, obtain long-term stable returns, and use smart insurance to carry out scientific and objective insurance plan portfolio planning.

An economic crisis or future attack

    From recovery and prosperity to recession and depression, mankind has never escaped the economic cycle, just like no one can stop the frenzied flow of time. The 2008 financial crisis pushed the global economy into a vortex of recession, but human beings, as a highly rational group, failed to prevent this from happening. And this time, the world will enter a "Great Depression" with a degree and duration comparable to that of the 1830s. The real economy will be hit hard, and the global financial market represented by stocks, bonds, foreign exchange, and business will Enter the "Ice Age".

    Crude oil is a veritable "king of commodities". When the price of crude oil climbed from US$30/barrel at the beginning of 2016 to US$60/barrel in mid-2018, everyone was clamoring, “Crude oil will cost 100 US dollars”. However, contrary to expectations, it turned its head down at 76 US dollars and fell for three consecutive months, closing at 45 US dollars for the year. Crude oil has been a resource highly dependent on every country for the past three centuries, and every price fluctuation of it has affected the global economic nerves. When the volatility of crude oil reaches a certain threshold, it will drive other varieties of the entire bulk commodity market to make follow-up fluctuations. The "Kashuji Incident" forced Saudi Arabia to increase oil production as a political compromise condition, which led to Russia's follow-up increase in production, which triggered a sharp drop in crude oil in the fourth quarter of 2018. You know, in the financial market, time is irreversible, and subsequent production reduction declarations and even production reduction actions cannot offset the impact of the previous increase in production. The downward cycle of crude oil has just begun.

    The opposite of the trend of crude oil is gold, which climbed continuously in the fourth quarter of 2018. Although the upside of gold is far from the conditions for a new round of bull market, the meaning behind its "counter-attack" is worth pondering. Gold has its own dual attributes, the commodity attribute of metal and the social attribute of currency. In the past century, the global financial market has become increasingly complex, which has pushed the currency attribute of gold to a higher position. As a result, gold has evolved into a complex of inflation hedging tools, credit hedging tools, and risk hedging tools. Although the sharp drop in crude oil may trigger a fall in raw material prices, thereby reducing inflation expectations, thereby shutting down the inflation hedging function of gold, the credit and risk hedging function of gold is quietly under the background of large turbulences in the prices of major global assets. Turn on. You know, once investors around the world start to abandon crude oil, the once-misidentified "hedging product", and begin to seek safer gold to avoid risks, the economic crisis will not be far away.

Up.

    The positive effect of raising interest rates to increase the attractiveness of the currency, thereby boosting the operating logic of the US dollar index has been unsustainable, because the negative effects of interest rate hikes follow. With the active interest rate hikes in the United States and passive rate hikes in some economies, funds from non-rate-increasing countries flow into rate-increasing countries through various channels, while private sector funds from rate-increasing countries accelerate their inflows into the public sector. It can be seen that global flows Sexuality is undergoing structural changes silently, and the global cash flow statement will soon be out of balance. Imagine that once the US dollar index peaks at 100 points and starts a downward cycle, the straight and cross markets in the foreign exchange market will be disturbed, and a large number of private sectors will experience liquidity tension, and the global cash flow statement is deteriorating.

    There have been some subtle changes in the bond market recently: 10-year Treasury bond prices have risen all the way from early October 2018, pushing yields down, falling from a maximum of 3.250% to 2.716% on December 28, while the yield of 30-year Treasury bonds has changed from At the beginning of November 2018, 3.467% fell to 3.020%, which supports the market's expectation that the Fed's rate hike will slow down. Since September 1981, the U.S. bond bull market that lasted for more than 30 years until July 2016 began to run in the opposite direction, which has caused more and more discussions on whether the bond market has entered a bear market, and whether the recent decline in Treasury bond yields is temporary or long-term The controversy has also made the market's differences between the bulls and bears in the bond market more serious. However, we should pay attention to some facts: the global debt structure and the maturity spread of US debt.

    In addition, the U.S. debt maturity spread has narrowed or even inverted. The previous occurrences were on the eve of the U.S. subprime mortgage crisis in 2008, on the eve of the burst of the U.S. Internet bubble in 2000, on the eve of the burst of the Japanese economic bubble in 1990, and in 1982. On the eve of the international debt crisis.

    The one-year and two-year U.S. Treasury bond yields were inverted for the first time since October 2008 on December 24, 2018, while the 2/10-year U.S. Treasury yield was only 19 left on January 1, 2019. The spread of 1 basis point is already the narrowest level since 2007. Short-term interest rates are still strong against the background of room for interest rate hikes, while long-term interest rates are no longer able to support it. This shows that long-term risk appetite is tending to decrease, which also indicates that the US economy has seen a downward turning point. This shows that the global balance sheet has become very ugly.

    Finance is the core of the modern economy, but financial crises do not necessarily evolve into economic crises, just as stock market crashes do not necessarily evolve into financial crises. The 2008 financial crisis did not evolve into an economic crisis, because a piece of domino was missing. Even so, it also announced the end of prosperity and the arrival of recession. This time, U.S. trade protectionism has made a comeback, and the background is very different from that in 2008. As long as a financial crisis occurs, in the context of a trade war, it can easily evolve into a global economic crisis that "multiple countries have broken out, the importance of each country varies, and the United States tries to pass it on."

    In other words, the trade war has already taken place and has had an impact. Unless it is completely lifted immediately, it is likely to become the domino that evolves from a financial crisis to an economic crisis. If this is the case, the global economy will go from recession to depression.