Potential perks for portfolios
For us there are two big questions investors and potential investors should ask:
1) Should we be worried about a US recession?
In brief, not yet.
Because of its dominant position on the world stage, if the US were to fall into recession it could signal the start of a large economic downturn. Global growth has been slowing for some time, however, so recession risk has already largely been priced-in by markets.
Negative performance in the second half of 2018 was partly based on concerns over slowing global growth. Central banks like the US Federal Reserve are also aware of the risks and acted to reassure investors that they were well prepared for such a slow-down.
Since the middle of 2018 we’ve also been making changes to portfolios to ensure they’re prepared for a slower growth environment. These include reducing our holdings in emerging market equity and the financial sector, and increasing our investment in government bonds.
2) Do opportunities exist?
In brief, yes.
There are still plenty of things going on that could serve as potential perks for portfolios.
A temporary trade deal between the US and China is looking increasingly likely. If it happens it could give a good boost to markets.
Central banks are also expected to remain reluctant to make moves that could curb economic growth. They are seeing the slow-down and reacting accordingly, which reassures some investors.
And believe it or not, Brexit will one day reach a resolution, ending the uncertainty it has created for the UK. Domestic business in the UK will be grateful for the clarity, whenever it comes.
That said, there is even now a Brexit-related opportunity for investors. The current uncertainty means you can buy high-quality UK companies at a good price – but their shares are likely to rise over time after a deal with the European Union is signed.
At Coutts we’ve acted on that potential, tilting our portfolios towards more domestic-orientated UK stocks. In our article on Brexit last month, our head of portfolio construction Alan Higgins described such stocks as “undervalued and having better earnings”.
2018 was not the norm
Arya says another reason people shouldn’t let 2018 take them away from investing is that it was a unique year.
“Last year, there was a disconnect between the fundamental factors that drive equity performance – which were positive – and actual asset returns,” he says.
“We experienced coordinated central bank tightening, with more than half of the world’s central banks raising interest rates, and the impact was felt in equity and credit markets. These tightening effects appear set to reverse in 2019.”
He adds, “One bad quarter doesn’t make for a bad five years and history shows that you are better off remaining invested rather than sitting on the side lines.”
Ultimately, sound financial planning should drive an investor’s behaviour rather than market timing, in our view.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.