Takeaways From a 450+ Investor European Road Trip

Published on18 MAR 2019

The article below is from our BRIEFINGS newsletter of 18 March 2019

Goldman Sachs’ Donough Kilmurray, who advises private wealth clients across EMEA, recently returned from an investor road trip across seven countries where he spoke with more than 450 investors. We caught up with Kilmurray who shared his perspectives on markets and client concerns. 

You’ve been on the road sharing the Investment Strategy Group’s 2019 investment outlook. How are you and your clients thinking about the markets? 

Donough Kilmurray: This is an investor trip that we’ve run for the past five years across Europe and more investors are attending each year. Interest has been strong in part because the markets are rattled, there’s fear of an economic downturn and the uncertainty of Brexit is looming. People aren’t sure how to invest in this environment. Our outlook, American Preeminence in a Rattled World, reminded investors to ride out any near-term turbulence and stay invested, particularly in US companies where fundamentals continue to look more favorable. The strength in January and February certainly validated the case for our clients to stay the course in US equities after a volatile fourth quarter. 

How are European investors managing their overall asset allocation in the current environment? 

DK: Since different parts of Europe have different investment cultures, the message of owning stocks – and, in particular, US stocks – resonates differently across the euro area. The Netherlands and the Nordic countries, for example, tend to be more comfortable owning stocks, while many southern European countries, such Italy and Spain, and even Germany, typically prefer privately owned companies and fixed income. As a result, there’s often a home-country bias bias in investors’ overall asset allocation, especially in southern Europe where investors tend to be more risk averse. While European investors have become more outward-looking in their investment portfolios, their overall asset allocation, which includes home-based private assets, tends to be more conservative.

One of our long-term investment theses has been to hold an underweight to emerging market assets, given the higher risks in general in EMs and our long-lived worry about the Chinese economy. That call played out well for us in recent years and again last year with fears of the trade war. Overall, our message to investors has been consistent: the best way to address market volatility is to have a well-diversified portfolio.

What are some of the top concerns on the minds of investors? 

DK: The most common question we heard when meeting with clients was: “How long can the current global expansion last and when will we enter a recession?” We believe recessions are caused by one of three forces: a cyclical overheating, an external shock or a structural imbalance. On the cyclical front, we don’t see signs of an overheating economy, even though the job market is strong. Wages aren’t growing too fast and inflation is on target. External shocks, such as a spike in oil prices, could also tip the economy into a recession. That was the case, for example, when oil prices rose very quickly during the 1970s. At the moment, however, we have an oversupply of oil on the world market.

Meanwhile, structural factors typically arise from an imbalance in the economy, such as high debt levels or asset price bubbles. To be sure, overall debt levels are higher than they were 10 years ago, but household debt levels have declined, corporate debt is at about the same level as before the crisis. Public debt has indeed risen, mainly in the US, but if there’s a government in the world that can cope with higher public debt, it’s the US. So between overheating, shocks or structural problems, we don’t see any near-term dangers in those areas.

How are you addressing investors’ concerns over the uncertainty over Brexit?

DK: The UK is probably the most influential country in Europe but we have to remind investors that in terms of its economic impact, it’s relatively small and varied. For example, the amount of sales of US listed companies that go to the UK is less than 2%; sales from Germany and France to the UK are between 4% and 5%, while sales from Irish companies to the UK are close to 20%. We think the primary impact, rather, is the sentiment connection. The uncertainty over a hard Brexit could cause a high degree of market volatility. It’s very much of an animal spirits thing because the actual economic impact is small. Our advice to investors looking to protect their portfolios against volatility goes back to building a well-diversified portfolio.