A shift to fiscal versus monetary policy will drive global equities higher in 2019 despite geopolitics and macro headwinds.
KKR ReleasesThe 2019 Global Macro Outlook
KKR released their 2019 Global Macro Outlook and there is little of surprise to be found within it. According to Henry McVey there is a shift from monetary to fiscal policy around the world that has altered the playing field for investors. Now, instead of loose financial conditions fueling investment, investors should expect to see tightening liquidity and higher interest rates produce “macro headwinds” for the global economy. Duh.
What this outlook does not take into account is the Fed’s recent shift in rhetoric. The once hawkish committed had been expecting to deliver 3 to 4 interest rate hikes over the next year and that outlook has withered and died. Now the market is expecting at most one hike over the next year with the growing possibility rates may be cut instead.
Slowing global and US economic acceleration has reduced upward pressures on inflation and that is a risk the FOMC must watch closely. If activity slows too much the FOMC may be forced to delay future rates more than expected, or cut rates like the market thinks could happen. James Bullard, FOMC member and President of the Federal Reserve Bank of St. Louis, thinks that inflation will miss current expectations over the medium term and that is no reason to expect rates to rise quickly.
This Is The Risk To Inflation Outlook
The risk is that economic activity will pick up again over the next year. This is possible in light of underlying strength in the US and growing momentum in trade talks. The US/China trade talks have progressed to a point high-level representatives are preparing to meet to hammer out details on key topics like forced-transfers of tech, opening Chinese markets, and much-needed structural reforms in China’s economy.
While there is a chance of economic downturn sparking an interest rate cut the more prudent outlook is that interest rates will remain at or above current levels into the foreseeable future. The FOMC is likely to hike rates at least one time this year and may wind up with two or more if activity picks up in the second half as it is expected to do.
Investors seeking protection from rising rates should turn their attention to the real assets asset class. The real assets asset class includes real estate, natural resources, and infrastructure which are all known to provide better risk-adjusted returns in volatile markets than traditional equities. Real assets and specifically infrastructure asset are unique in that there are high barriers to entry which limits competition, companies enjoy long-term contracts and concessions, revenues usually regulated by law, and pricing is tied to inflation…but there are still risks.
There Are Risks To Infrastructure Spending In 2019
The biggest risk in 2019 is the trend toward populist governments that are expected to impede construction and infrastructure projects The main risks are in Mexico where the newly elected President Manuel Obrador has already canceled major projects. Other areas of concern are Italy, Poland, and Brazil. The biggest losers will be construction firms and specifically those tied to the aforementioned countries.
Analysts at Fitch think there will be a shift toward relieving transmission bottlenecks in developing nations that have already begun to build-up power generation and waster water capabilities. This means a build-up of transmission infrastructure including power lines, transfer stations, and pumping facilities to enable broader reach of service within these regions.
This does not mean power generation is not investible, it is, it’s just that transmission services have been slow to catch up. Power generation projects are expected to benefit from ample liquidity long into the future on the well-known fact current power generation in many emerging markets is not sufficient to meet the needs of local populations.
Craig Noble, Cheif Investment Officer and Portfolio Manager at Brookfield’s Global Listed Infrastructure Income Fund, operates on the philosophy infrastructure is driven both by the build-up of emerging markets, but also the maintenance and upgrading of existing infrastructure globally.
The Outlook For Investment Is Good
The long-term outlook for global infrastructure spending is robust. The G-20 estimates that at current spending levels and trend there is and will be a spending-deficit long into the future. While this is no guarantee governments will spend money on needed investments we can be assured spending will continue to increase indefinitely. Add to this a trend towards privatization and the investment opportunities increase.
One method of accessing the global infrastructure boom is through an actively managed closed-end fund like the Global Listed Infrastructure Income Fund. It is a high-yield closed-end fund fully invested in infrastructure equities around the world. The focus is on the US and North American with more than 55% of portfolio assets allocated to that region. Another 25% goes to equities in the UK and England with the remainder focused primarily on Asia-Pacific.
The comparison to passively-managed funds is not pretty, for passive management. The iShares global infrastructure ETF offers many of the same benefits as the Global Listed Infrastructure Income Fund (INF) but pays less than half the yield. At current prices, near $11.25, the INF yields close to 9.0% while the IGF pays only 3.35%.
Additionally, the IGF is a fixed basket of stocks pegged to the S&P Global Infrastructure Index. Managers at the Global Listed Infrastructure Income Fund are free to target any stocks they believe will perform well.
Real Assets For Portfolio Diversification
The bottom line is simple. Real assets and infrastructure may not be a hot-ticket item in terms of media coverage, they are not likely to see massive growth, but what they do give is better for your portfolio anyway. Infrastructure stocks can expect to see steady revenues backed by long-term contracts and regulated pricing, they give inflation protection but costs and pricing are linked to inflation, they give better than average dividend yields, and they diversify you away from traditional equities and bonds.