While 2018 was a year of high expectations and disappointing outcomes, 2019 has the potential to be the polar-opposite.
Most discussion among investment professionals is about the slowdown in China, rising global interest rates, trade wars between the super powers and the US government shutdown.
But the concerns are overdone even if the next few months prove difficult for many investors.
Expectations are heavily depressed but that means there’s plenty of room for positive surprises, and a short, sharp retracement will trigger bearish commentary which, in turn, will present a huge buying opportunity.
Some of the most promising opportunities are in emerging markets, reflecting the recent downward adjustments in global equity and fixed income markets, and the devaluations of foreign currencies against the US dollar.
There are signs that the US dollar and global inflation have peaked and we are at the end of the central bank tightening cycle. Put all that together and it could be a good year for emerging markets investments.
Markets to consider
Our multi-asset portfolios and, in particular, our Dynamic Markets Fund (which I manage) have increased our allocation to emerging market equities to 15 per cent. That’s the highest level since 2016. In fixed income, we are moving back to emerging market debt for the first time in three years.
Commodities also present good buying opportunities: oil prices have fallen sharply since October – the benchmark crude oil price is down 40 per cent – reflecting higher output from some of the biggest oil producers including Russia and Saudi Arabia.
But there’s plenty of reasons to think oil prices will start rising again as US sanctions against Iran, Saudi Arabia’s need for higher, stable oil prices and little spare capacity within the Organisation of Petroleum Exporting Countries (OPEC) means the energy sector is exposed to supply disruption in other large producers, including Venezuela, Nigeria or Libya.
I expect more disruption across the commodity supply chain as nationalism grows, labour strikes become more prevalent and the push for clean air grows, especially in China.
What to avoid
I’m cautious about US-based technology stocks. The so-called FAANG stocks – Facebook, Apple, Amazon, Netflix and Google (owned by parent company Alphabet) – had a bumpy ride in the second half of 2018 on the back of privacy scandals, calls for greater regulation and the US-China trade war.
I’m not sure that has fully played out yet and won’t be rushing into that sector.
China and trade wars
The outlook for China is, as always, crucial for the global economy. While some experts are concerned about the China growth story – it expanded by just 6.6 per cent in 2018, the slowest rate in almost three decades – I’m more optimistic.
Chinese authorities are undertaking a sensible, multi-pronged approach to turning the economy around using both monetary and fiscal policy.
Chinese data is still very weak but liquidity is abundant. Furthermore, money supply growth is picking up momentum and that has historically led to a rebound in activity with a small lag. I believe we are past the worst of Chinese economic weakness.
The ongoing trade conflict between the US and China remains a concern, but it has moved from an acute risk to more of a chronic issue.
The problem is that the longer it goes on, the greater the long-term implications. Trade wars result in higher inflation globally and higher bond yields. That’s not being priced in by financial markets.
Some economies will benefit from the ongoing spat, including those with low labour costs. Countries able to replace China’s low value-add production, that are removed from the China-US crossfire, could benefit. Vietnam, Cambodia, the Philippines and Indonesia are all examples.
Global interest rates
Another critical factor for investors over the next 12 months will be the behaviour of central banks around the world. Will they continue lifting official interest rates or take a breather?
Fortunately, there has been a broad-based fall in inflation expectations. Inflation expectations are a critical ingredient of actual inflation, meaning a fall in expectations has taken pressure off central banks to tighten monetary policy. Stabilising inflation expectations is likely to be theme for 2019.
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