A global trade war, policy error, European economic and political risks, a failure of Chinese stimulus and Brexit are five key risks that Aberdeen Standard’s Bambos Hambi believes could harm the global outlook in 2019. 
Hambi (pictured), Aberdeen Standard’s head of fund of funds and manager of its MyFolio range, said there are a number of key challenges facing investors this year, but also some positive developments.
The first risk the fund manager is concerned about is the continuing “tit-for-tat” global trade war between the US and China and the potential for it to exacerbate a global growth slowdown, especially if US president Donald Trump’s attention turns to other nations.
The reigniting of the US-China trade dispute has seen markets sell-off recently and heralded a return of stock market volatility after a relatively benign start to the year for markets.
Performance of indices in May
Source: FE Analytics
“If [US-China] gets resolved – and I don’t think it will get completely resolved – but if we have an improvement there the tension may turn to Europe,” he explained.
“Auto manufacturers seem to be next in the firing line, and the German auto manufactures are a target for president Trump. So be aware that global trade wars could be around for a while, the attention just gets moved from China to Europe and maybe even Japan.”
The potential trade war with the US is not the only issue that China is facing, however.
Hambi said another risk to the global market outlook could emerge from China’s attempts to stimulate growth should the measures fail.
Worries over the slowdown of China’s economic growth have hung over global markets for some time, despite expectations of a 6-6.5 per cent rise in GDP this year, according the manager.
Although it has one of the strongest growth rates in the world, said the fund manager, and plenty of tools with which to stimulate the economy, investors should still remain cautious of any signs that the stimulus has failed.
Third on Hambi’s list of potential risks to global markets is policy error, although this has receded somewhat recently.
“The major risk we see is a policy error by central banks,” the multi-manager explained. “Pushing up interest rates too far and too quickly.”
After concerns that the Federal Reserve had pushed too hard to normalise rates in 2019, the central bank announced it would be holding off any further imminent hikes earlier this year.
Effective Federal Funds Rate over 10yrs
Source: St Louis Federal Reserve
The move has taken some pressure off markets and paved the way for the strong returns seen during the first quarter of the year.
Hambi said that central bankers were now taking a “very cautious” tone and that the market has begun discounting the probability of further rate hikes.
“In America they seem to have paused any interest rate rises for a while now and the market is potentially still discounting the next move being a cut,” the MyFolio manager said.
“[That] could happen but it’s going to very much be data dependent and the data at the moment is strong, so it is being pushed out.”
Next up on the list of risks is Europe, where Hambi continues to harbour concerns about mounting political risk and low growth in Germany, the eurozone’s largest economy.
The Aberdeen Standard manager said Germany just missed moving into a technical recession recently.
On the political front unrest continues, illustrated by the ‘yellow vest’ protests in France and budget disputes between Italy and EU.
Finally, and closer to home, Hambi highlighted the threat of Brexit to the global outlook.
After the UK’s referendum result on EU membership was announced on 24 June 2016, UK stock markets slumped before later recovering. And the panic has still not entirely left the UK market nor stopped having an impact on sterling.
Hambi said while Brexit negotiations are now closer to the end than the beginning, it is still an issue that investors need to be aware of.
However, the fund manager does think that there are a number of positives to come out of the global market this year.
The first being that despite the global economy slowing it is still continuing to grow.
“We’re seeing quite a few green shoots of improvement across the board,” he explained. “The green shoots we are seeing are mainly from China and US continues to grow very nicely. In fact, the Q1 growth rate has surprised everyone in America.”
This is being supported by growth in the Chinese economy, which Hambi said had been slowing quite dramatically after double-digit economic growth in recent years, although the stimulus appears to be paying off.
Another positive is that while strong growth and low interest rates usually lead to a rise in inflation, said the MyFolio manager, there have been few signs of this, so far. An improved inflation trade-off is keeping price pressures subdued and allowing advanced economies to keep lower rates for longer, he said.
Finally, the earnings growth outlook also remains positive, according to the manager.
Although earnings had been growing at a double-digit rate during 2018, single-digit percentage rises were also positive, said Hambi.
He added: “We’re looking for mid-to-high single-digit earnings growth figures going forward. First half of this year is going to be slower and the second half of this year [will be] much, much better.”
As head of the MyFolio range, Hambi currently oversees 18 funds, the biggest of which is the £3.8bn Standard Life Investments MyFolio Managed III.
Hambi operates a ‘five-P’ process within the MyFolio range, focusing on philosophy, process, people, performance and price.
Each fund is managed according to a defined level of risk which varies fund to fund to offer alternating levels of projected investment risk and return. For example, the Standard Life Investments MyFolio Managed III runs at a risk rate of 45-75 per cent.
Launched in September 2010, Standard Life Investments MyFolio Managed III aims to make returns by investing largely within Standard Life Aberdeen’s group of companies.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over the last five-years it has made a total return of 15.72 per cent, slightly lower than the 21.33 per cent gain for the average IA Volatility Managed peer. The fund has an ongoing charges figure (OCF) of 0.87 per cent.