If you go back to the beginning of the year, we were in a period of synchronized global economic growth. That was going to support earnings growth. And here in the US, we were going to have an extra kicker from the tax cuts. So, I think we went into the year feeling reasonably sanguine about the earnings outlook and the economic growth outlook.
Instead what happened is, I think, a number of both economic and political risk[s] really reared their heads. On the economic side, I think it was really the strength of the US dollar as a consequence of the Fed raising rates, caused some dislocations in emerging markets. You also had that strong dollar hurting, I think, to some extent, just the whole economic growth picture. So, you have Europe slowing down and the outlook for corporate earnings started to soften as we went through the year. Then you overlay some real political risks, like the Chinese-American trade war; this could be a big risk, to global supply chains across a number of different products. That uncertainty would probably cause businesses to pull back on investing and really dampen the more favorable economic growth picture that we all carried in our head at the beginning of the year.
You can’t really anticipate every political risk that comes up and insulate your portfolios from that. So, I think what, as an investor, you know, what you have to do is just understand what are the, maybe, predominant risks that are really going to impact sentiment and impact corporate earnings. And ensure that you’re not too skewed in your exposure to that. When there’s a lot of uncertainty, most investors react to that uncertainty by getting very defensive, right. Because you’re not sure what’s going to happen and I think the natural tendency is, what can I do to avoid losing money? I think that there is a distinct possibility that the kind of, US-Chinese trade war intensifies over the course of 2019. And that would be bad for markets. And it would be negative for risk assets.
But there’s also a decent chance that it gets resolved. And many assets today are priced as if that resolution won’t happen. So, having some portion of your assets in, kind of, safe places—government bonds would be an example of that. And even within stocks, owning higher-quality companies. Lower- volatility companies. Some, some things that will, kind of, weather the storm if we get that storm. But on the flip side of it, the assets that are priced for a really bad outcome are very cheap. And that includes a lot of emerging markets today. And it includes really beaten-up value stocks. So, I would have, kind of, my exposure spread amongst those things, not knowing really what the outcome is going to be.
As a long-term investor, you really do need to have a set of investment beliefs that anchor you in terms of how you’re going to evaluate what are good, you know, opportunities to invest in and what don’t have the right risk/return framework. There are many different ways to win as an active manager. There isn’t just one set of beliefs that work.
But what is critical is, once you’ve established your beliefs, and you know what your competitive advantage is in terms of researching that and understanding which companies have those characteristics, you need to stay true to that. And I’ve seen too many people falter when volatility or risk moves against them, and they kind of lose their confidence in what has been a tried and true approach. And that’s when you get whipsawed. That’s when you just overreact to very short-term noise. Try to do what like, makes sense this moment, and then next week it’s a different concern in the market, and you’ve completely changed your positioning, and you often find yourself on the back foot.
So, a lot of my time is spent with the portfolio managers, really going through their discipline, how they’re navigating an environment like today, right. Are they sticking with their discipline? Are they really paying attention to how the risks are evolving? And some of the portfolio managers were pretty defensive going into this, had some excess cash, and have used volatility as an opportunity to deploy some of that cash at some very attractive prices.