More volatility ahead for 2019

AMP Capital’s Dermot Ryan has warned financial planners to brace for more volatility in 2019, as the nascent trade war between the US and China re-emerges and the global economy is weaned off historically low interest rates. In recent years, volatility has been subdued, but last year after only seeing one small spike in February volatility made a big return in all asset classes in the last quarter of the year.

Many of the issues that caused the volatility remain unresolved: the US-China trade war, weak lead economic indicators and the building rise of global interest rates. While Australian equities have suffered less so far, we expect bouts of volatility to throw up some interesting investment opportunities.

Global share markets have enjoyed the longest bull market in history in recent times, led by US equities. Even balanced funds, which hold defensive as well as growth assets, are showing near record returns. Volatility may well dent some returns, but will throw up some interesting investments. 

However, Mr Ryan, AMP Capital’s Australian equities co-portfolio manager, says higher interest rates will start to crimp corporate profit growth in 2019 as debt financing costs for companies start to increase and consumer spending is curtailed, increasing the risk that the markets will be unable to continue their strong growth.

The trade war between the US and China will also re-emerge as an issue in early 2019, posing a risk to global economic growth but particularly threatening economies in Asia. “There’s been a temporary little ceasefire in the trade war at the moment,” said Mr Ryan, speaking of the Christmas/New Year holiday period. “That’s something that will re-emerge in Q1.”

US growth

Mr Ryan’s warning comes despite the US economy continuing to move from strength to strength, with unemployment at cyclical lows and the Trump tax cuts providing a backdrop of stimulus to an already growing economy.

Even if higher interest rates start to slow growth, President Trump has the ability to deploy domestic infrastructure spending next year, which will underpin growth if there is risk of a slowdown.

“We think they’re in a very flexible position,” said Mr Ryan. 

Income over growth

Investors preparing for the end of the bull market are being advised to focus on finding stable companies, with good balance sheets and strong free cash flows or income rather than chasing concept or overpriced stocks.

Defensive companies with good balance sheets are expected to outperform, while developers and contracting companies are expected to benefit for the next few years from government spending on infrastructure.

But Mr Ryan has cautioned investors against the traditional large cap leaders in the Australian market like the banks, telcos and real estate investment trusts, saying opportunities lie instead with low-growth companies with reliable earnings.