Trade, technology and fiscal tensions
The list of things to look out for in 2019 is already looking quite long so there will be plenty to keep us busy. The two main issues are whether the trade and technology tensions between the US and China spiral into a major breakdown in their relationship, and whether the fiscal tensions between Italy and the rest of the EU descend into another major EMU crisis.
Fortunately, towards the end of 2018 there was good news on both fronts, but neither issue has been settled.
Key economic issues to watch
In 2019 we’ll also need to pay attention to some key economic issues. Will the US Federal Reserve make a policy error and tighten too much? Will inflation accelerate unexpectedly in any of the major economies as labour markets continue to tighten? Will China manage to control its economy and ensure some recovery? And, finally, can companies resist the squeeze on profit margins as costs rise?
Any movement in the US dollar will also provide an important signal. If it stabilises or even falls back against its major trading partners, this will probably be a decent year for investors. But if it continues to appreciate sharply then a defensive approach is more likely the order of the day.
Brexit – the real impact on markets
Brexit will continue to be a focus in 2019 but the range of outcomes is still rather wide. These partly depend on political decisions in the UK and EU but also on the time it could take the UK government and businesses to make some important economic decisions.
In the short term sterling is clearly waxing and waning in response to news from Westminster, which in turn affects the valuations of the FTSE® 100 and FTSE® 250 stocks against their counterparts. But despite market falls caused by Brexit at the end of 2018, the FTSE® 100 Index is almost at the same level as it was at the beginning of the millennium. However, if you’d been invested from 2000 until now in a portfolio similar to that of the FTSE® 100 and had reinvested dividends, in total return
terms you could still have doubled your money (not taking into consideration charges or the impact of inflation). Remember though that past performance isn’t a reliable guide to future performance. Also the value of all investments can go down as well as up and may be worth less than was paid in.
The UK will forge a new path
Politics aside, we must recognise that Brexit means the UK will move onto a different path to the rest of the EU. Most of the economic analysis suggests that Brexit is a slow-moving supply side shock to the UK, which will lower the economy’s trend rate of growth, towards say 1.5% a year rather than 2% a year. However, the UK might offset this over time – if it puts more resources into business investment, infrastructure, skills and training, and orientates the economy towards faster-growing parts of the world economy than the EU.
For now though, UK assets have been marked down by global investors since the Brexit vote. And, in the short term, volatility is the name of the game as UK markets will continue to move in response to political news, valuation opportunities or moves in sterling.
Further ahead a slow growth domestic outlook isn’t great news for many UK firms. The question is – can overseas-orientated companies continue to invest and scale up to make a success of the global opportunities?
Market drivers – profits trump politics
At Aberdeen Standard Investments our watchword is ‘profits trump politics’. There’s so much focus on political and geopolitical issues at present, for understandable reasons. However, we must not forget the underlying economic drivers of markets: for example, do companies continue to drive positive profits growth, does inflation remain contained, does positive employment growth support consumer spending?
At the macro-level, a pleasant surprise could be the amount of effort which the Chinese government put into not only stabilising but even expanding the economy in 2019. And at a micro level, companies putting cash to work and banks lending would give investors more confidence that this business cycle still has legs – that would be very helpful.
We certainly believe fund managers have a wide range of attractive investment opportunities facing them if political uncertainty dies down.
Challenges and opportunities ahead
The main challenge is whether this investment cycle is coming to an end. There are some amber- flashing warning lights we need to be aware of. These include:
- stresses between the first and second largest economies in the world (the US and China)
- pressures on highly indebted companies and countries
- weakness of some parts of the corporate bond market, and
- increasing restraint being shown by some banks when lending
On the other hand though, there are opportunities. Valuations improved so much in 2018, especially for such assets as emerging market equities and bonds – and this was against a backdrop of quite pessimistic views among many confused investors.
So, while we see this cycle as long in the tooth, we don’t think that it need end quickly. There have been two major slowdowns since the 2008 crisis, and this third one need not be the final one – as long as major policy errors aren’t made.
Investment resolutions for the new year
My main resolution is the same as last year – to read less about Brexit! The UK is only 2% of the world economy, so there are more important issues out there. I also find it useful to think about investing in the same way as spring cleaning or tidying the garden; it makes you feel better when you’ve done it. So it’s a good idea to spend time looking at the portfolio of funds, shares, bonds, savings you’ve put together. Why is each one there? Does it need pruning or adding to? Regular investing can build up over time, but it’s key to understand objectives – don’t get pulled along by what others are doing.
On a more personal note, some friends of mine have unexpectedly died in recent weeks leading me to acknowledge that investing and savings are only means to an end. So don’t forget to spend money and enjoy life – especially with your nearest and dearest. Happy New Year!
The information in this blog should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. The information here has been provided by Aberdeen Standard Investments and is based on their understanding in January 2019.