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January 2019 Outlook


Listening and reading the news and watching markets gyrate like a yoyo over the festive period has been a sobering affair – I can’t say I have been bouncing to get back into work!

Just as investors had come to expect high single to double-digit returns as the norm, last year certainly gave us a reminder that performance unfortunately does not always start with “+”.

Looking across equity markets which are often a good indicator for portfolio returns, the Eurostoxx 600 had its worst year since the 2008, down over 15%, the FTSE100 down over 12%, US Markets down 6% with some Emerging Markets down over 20%.

Going back 12 months in time – this certainly wasn’t in the script. Most commentators were expecting more of the same as the World Economy was firing on all cylinders with US, Asia, EM & European Growth. The 4% global growth figure was in sight which would have put us at levels not seen since pre-2008 crisis days.

Well, what’s changed?

It’s clear that the 4% global growth figure has not been hit. However, whilst growth has slowed we are hardly heading for a recession, with global growth still around 3.5% and economic fundamentals remaining mostly positive.

What has been hit is sentiment and in a bad way. According to Lloyds Private Bank, client sentiment has dipped to its lowest level since 2008.

It is this “fear factor” which has affected market conditions over the last 6 months. If we all worry more than is justified, we may collectively spend too little, and actually frighten ourselves into a downturn. As seen over Christmas with political shocks such as the deadlock in the US, markets can react strongly.

Still, it would take a big event to really derail the current economic cycle as we still have central banks which can serve as a buffer.

So what are the pitfalls to take into consideration?

US – China Trade Wars – how much further will Donald Trump continue to hurt the US economy and impair his chances of re-election in late 2020?

Italy – will the radical coalition government plunge their country into a genuine Greek-style debt crisis?

Brexit – will Britain’s mostly pro-EU political class allow us to fall over the hard Brexit cliff? Or instead use the ten weeks between the likely death of May’s deal and Brexit day on 29 March 2019 to stop it through a softer Brexit option or a new vote to stay in the EU.

Will China allow a hard landing happen? Or will it dip into its ample policy toolbox to smooth the inevitable slowdown in cyclical momentum and trend growth.

Usually the worst risks are somehow avoided as was the case at a similar juncture back in 2011 when a more positive outlook turned sentiment sharply and prices rebounded sharply.

As always, it is important to avoid the noise and focus on the long term objectives.

The above “pitfalls” will be lines on a chart when looking back at these times in the not too distant future. An equally likely ‘risk’ is that clients will look back at a turnaround and ask why we didn’t invest more at these depressed levels!!

I wish you a healthy and prosperous 2019.

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