The past year has proved to be a turbulent one in the financial markets as the US-China trade war took off, Brexit gloom set in, and interest rates rose. But will 2019 be a more positive year for investors? We get the lowdown from investment experts
Moneywise has canvassed movers and shakers in the investment industry, from fund managers to financial planners, to find out how they expect your investments to perform in 2019 and what they think investors can do to prepare. Here’s what they have to say.
Volatility will continue
Tony Wise, portfolio manager at Wise Funds, believes that 2018 was not the easiest year for investors to navigate.
He says: “While the era of easy liquidity is coming to an end, adjustments have to take place for investors to take the new reality into account. These periods of transition are rarely smooth.
“When combined with the rise of populism, trade tensions, political risks and concerns about slowing growth, the transition gets even rockier.”
Terence Moll, chief strategist at Seven Investment Management, believes that market volatility will continue as a result of these factors.
“The world economy in the year ahead will be rather like it was in 2018,” he says.
“Growth will be healthy, interest rates will drift up further, politicians will throw their toys around and markets will be jumpy.
“Almost all of the big financial markets sold off in 2018. Next year should be better and we expect equity markets to drift up overall.”
Debt could pose a huge threat
Romain Boscher, global chief investment officer for equities at Fidelity International, says that the biggest threat to equities or shares is debt.
“The 10-year quantitative easing experiment, coupled with a debt-fuelled boom in China, has left the world with a big tab to pay.
“Central banks lowered the cost of debt funding in response to the global financial crisis in 2008, and there’s a natural limit to how far and how fast they can normalise it.”
Given the sheer amount of debt in the global economy, a full return within a few years to the aggregate global interest rate of the last cycle, around 4.5%, would be unaffordable.
“While the global aggregate interest rate increased from 1.2% to 2.2% over the past two years, it is close to hitting a new top, which we put at around 2.5%. Going further than this would risk triggering a new financial crisis, which is something no central bank is willing to do.”
US interest rates and inflation will be a key theme
Ben Lofthouse, manager of Henderson International Income Trust, thinks US interest rates and inflation are a key theme for investors.
“In the US, we’ve seen interest rates normalising to some extent with low unemployment and signs of inflation in wages certainly impacting companies,” he says.
“Currently, other developed markets aren’t really seeing this and pricing in inflation, so it makes this area one for the biggest potential change based on where markets sit at the moment.”
The US economy remains important for investors
Events in the ‘trade war’ between China and the US have captivated markets and sent indices fluctuating wildly in 2018. But with a provisional agreement between the two nations in place, both markets are key to the year ahead.
Mr Moll says: “The key question concerns the US, since it sets the tone for the world’s financial markets. We think US growth will slowly ease but remain solid for a while yet, with no danger of recession until 2020 at the earliest. US companies are in good shape and US and global earnings growth should remain firm.”
Both China and the US markets are key to the year ahead
But David Coombs, fund manager at Rathbone Multi-Asset Portfolio Funds, is still confident of US equities’ ability to perform for investors.
“We are keeping tabs on several areas that we feel are most important for the global economy: the strength of the American consumer, the steady deceleration of Chinese growth and the pace of global monetary tightening,” he says.
“Most of our time is spent ensuring that the companies we invest in are the best in their field; that they are being managed effectively; and that they have the best opportunities to grow. We are constantly assessing whether the price of these assets is right, and whether we should buy more or take profits. As it goes, we’ve found this shopping list tends to lead us to US companies.”
China is one to watch
But Rick Lacaille, global chief investment officer for State Street Global Advisors, thinks that China is one to watch for 2019.
“China matters most among emerging markets for global investors in 2019. Not only is it an important driver of global growth, it is also increasingly important to global markets as major emerging market equity and debt indices begin to include onshore Chinese securities,” he says.
“Moreover, markets are only beginning to digest what a fundamental shift in relations between the US and China might mean for future growth.”
Personalised approach to e-commerce
Jenny Tooth, chief executive of the UK Business Angels Association, says: “In regard to what 2019 will entail for consumer investors, the most successful retail and e-commerce businesses are those that can process consumer information, intelligence and sentiment to personalise their offerings and approach. E-commerce businesses will ride out the challenges of Brexit and therefore I believe they will be highly important arenas for investment.”
Pessimism over Brexit could persist or feelings can change
Closer to home, Brexit is the political word on everyone’s lips. With the outcome of events unclear as the UK moves towards leaving on 29 March, investors are urged to be cautious.
Richard Hunter, head of markets at Interactive Investor (Moneywise’s parent company), says: “In the words of one institutional international investor, the UK equity market is currently close to being ‘uninvestable’, as Brexit concerns – let alone the possibility of a Labour win if a general election was called – weigh heavily on investors.
“In a survey earlier in the year, the FTSE 100 ranked last among investors (and even below cash as an asset class) as a preferred investment destination. As such, not having partaken in the global market rally earlier in the year, the FTSE 100 stands down some 8.5% in the year to date.
“The best advice for investors is to focus on what you can control”
“The relentless surge of pessimism could persist during 2019 as the full ramifications of Brexit become a little clearer.”
However, Mr Hunter thinks: “A small change in sentiment toward the UK market could begin a domino effect, and as such, the FTSE 100 could well transform from an investment frog to a prince in 2019, given even the smallest of nudges.”
Diversifying is essential
Mike Walker, financial planner at Prest Financial Planning, thinks investors should be careful to diversify.
“Whether investing defensively or for growth, I would also consider spreading my investments geographically and not just relying on the UK markets.
“We can’t know what the markets will do next year but a ‘no deal’ Brexit would clearly have some effect – almost definitely negative – on the stock markets, and quite possibly on UK government bond values too,” he says.
“It may sound boring, but in most cases my advice to clients would be ‘as you were’. If you are investing for the long term, then you should hold a diversified basket of investments that is suitable to your appetite for, and capacity to take, risk – and this shouldn’t change because you think the stock market may be going to rise or fall over a given short-term period.
“If you are investing for long-term growth, the important thing is not to get spooked and sell in a falling market. If you are making regular contributions, for instance to an Isa or a pension, then dips in the market can actually provide a buying opportunity.
“That said, if you are making withdrawals from your capital, you should be invested more defensively. If you’re taking money out in a falling market, you will have less money to benefit from any later recovery so you need to minimise your exposure to volatility.
“Defensive assets could include shares that regularly pay strong dividends, which are usually accessed through equity income funds, and corporate bonds.”
Keep a calm head
Ray Black, chartered financial planner and managing director of Money Minder, says reacting emotionally is dangerous for investors.
“Keeping a calm head and not reacting emotionally to losses is more important than ever. A wise investor will not let their emotions rule their investment decisions. None of us like losses and we all hate to see our money going down in value, especially if we have worked hard to save it in the first place. Remember that what goes down in value is cheaper to buy than it was before and losses are only secured when you sell,” he advises.
Dan Brocklebank, director UK, Orbis Investments, says investors shouldn’t get too bogged down in trying to guess what will happen.
“The good news is that you don’t need to be able to forecast to be successful at investing. As in life, the best advice for investors is to focus on what you can control, and adopt healthy behaviours,” he says.
“That means things like keeping a long-term focus, avoiding over-trading, and pound-cost averaging [investing regularly to smooth out highs and lows]. Above all, avoid getting caught up in speculative manias – the best investments are almost never the ones everyone is talking about.”