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Don’t let last year put you off investing

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Summary

With markets bouncing back from a challenging 2018, you could miss out over the long term if last year’s bumpy ride made you nervous about investing.

2 min read

Now could be a prime time to invest in a diversified portfolio or fund for the long term, despite a tough 2018 and slower economic growth.

One bad year does not necessarily mean more to come. US stock index the S&P 500, for example, has delivered positive returns in 23 of the past 28 years. And markets have certainly bounced back strongly so far in 2019. It seems they were overly-pessimistic about economic growth at the tail-end of last year but are now in brighter spirits.

Coutts portfolio manager Arya Matamedi says, “In our view, recession risks were overblown in 2018 but we recognise that we are in a slow-down environment. We have been actively positioning our portfolios in light of softening growth, making carefully balanced decisions while maintaining regional diversification.

“We’re seeing similarities to the sell-off that happened in the second half of 2015. Back then, markets were also worried about the economic cycle ending. What prompted the reversal was a pause in interest rate hikes from the US Federal Reserve, a softening in US dollar appreciation and economic stimulus in China. Part of the rally in 2019 can be attributed to these factors again.”

The UK offers another example of how you might miss out if you let market turbulence deter you from investing. Despite the Brexit backdrop of uncertainty, the FTSE 100 has returned around 27% since the European Union referendum in 2016*.

Past performance is no indicator of future performance though. Always remember that investments can fall as well as rise and you might not get back what you put in.

* Source: FTSE 100 from 24 June 2016 to 14 March 2019, with dividends reinvested

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“We have been actively positioning our portfolios in light of softening growth, making carefully balanced decisions while maintaining regional diversification.”
Coutts portfolio manager Arya Matamedi

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.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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