Investor pessimism is high this New Year. The dismal performance of a number of stock markets in 2018 disappointed many. Trade wars, Brexit and rising interest rates weighed heavily on investors’ minds – and continue to do so. One of the biggest concerns on investors’ minds today though is whether or not we’re on the cusp of a recession.
The current economic cycle, which began in March 2009, has been going on for almost 10 years. This makes it one of the longest stretches of global economic growth on record. “The question I keep getting [from investors] is when will this economic cycle end,” said Davy head of global investment strategy Alan Werlau. “We are moving into a period in 2019 when the economy will still be growing but at a slower, yet healthy, pace.”
Although Barclays believes that investment returns this year won’t be any worse than in 2018, the financial institution is urging investors to be cautious. “Bit by bit, 2018 has turned into a nightmare for global financial assets,” said Barclays in its latest global outlook. “We do not believe financial assets will rebound strongly in 2019. The good news is that 2019 returns are unlikely to be as bad as 2018. At some point this year, the US Federal Reserve will likely approach the end of its interest-rate-hiking cycle. We expect the world’s major economies to still grow at or above trend. On the other hand, global growth should be a little weaker in 2019 than in 2018. After years of positive returns and low volatility in the run-up to 2018, investing is set to become more challenging in the months ahead.”
Barclays is advising investors “to lower their expectations and to be nimble”. “In our view, the best years of the decade-long economic recovery and market rally are behind us,” said Barclays in its global outlook. “We recommend entering 2019 with a cautious frame of mind, with subdued expectations for financial-market returns, and prepared for the higher financial volatility which accompanied the October sell-off to be more persistent than such spikes have proven in recent years.” So against this backdrop of investor caution and slower economic growth, which investments could come up trumps in 2019 and which could disappoint?
Barclays describes itself as “cautiously optimistic on US equities” – in particular US healthcare, information technology, and materials stocks. Stockbroker, Davy is also tipping global healthcare stocks. “The sector we like most and which we feel will continue to do well is healthcare,” said Werlau. “Global healthcare stocks are offering fair value. We like healthcare as a sector because it performs well at this point in the economic cycle. We feel healthcare will continue to outperform in 2019 and beyond.” In particular, the shares of healthcare companies specialising in global ageing or global obesity could be worth considering, according to Werlau.
Investors should increase their exposure to quality stocks (stocks which typically offer more reliability and less risk), advised Werlau.
“When you are late on in an economic cycle [as we are now], the emphasis should be on getting quality stocks into your portfolio,” said Werlau.
Quality stocks typically include companies with good corporate governance; clean and strong balance sheets; and less debt.
Walmart, McDonald’s, Pfizer and Procter & Gamble are some stocks recently tipped by the US financial giant Citigroup as quality stocks worth considering. Some stocks recently described by the investment bank Goldman Sachs as ones which it considers to be of high quality include Alphabet (the owner of Google), PepsiCo and Mastercard.
Companies with strong competitive advantages are also worth considering, according to the Dublin wealth management business Gillen Markets. “Ryanair is one company which has a much lower cost base than all its competitors,” said David Coffey, senior investment adviser with Gillen Markets. “While the airline industry is cyclical in nature, it is also a structural growth story as people continue to travel more regularly.” (A cyclical stock is a stock whose price is affected by ups and down in the economy).
Gold & inflation
Inflation is something investors should watch closely this year – and which could see gold and silver mining stocks do well, according to Coffey.
“With many developed economies already at or close to full employment, inflation may start to edge higher in 2019,” said Coffey.
“We believe that gold and silver miners would benefit if inflation [in Europe and the US] was to move substantially above 2pc. Gold tends to do well when inflation is high and the gold and silver miners are highly correlated with the price of gold and silver.
“We also think the gold miners look like good value at current levels regardless of what happens with inflation – and if inflation does go higher, the goldminers should benefit. “The Philadelphia Gold and Silver Miners Index (a stock market index of 30 precious metal mining companies) is back trading at levels it traded at in 1983. This sector has been out of favour with equity investors for a long time and may appeal to contrarian investors.”
Some analysts expect emerging market shares to do well in 2019, but others are more cautious.
Emerging markets include the markets of emerging or developing economies, such as China and India. “I think the global economy will do well next year – and in that environment, emerging markets are the one to buy,” said Andrew Milligan, head of global strategy with Aberdeen Standard Investments (ASI). “We like emerging market debt.” Emerging market debt includes sovereign and corporate bonds issued by less-developed countries. Such bonds often carry a lot of risk though. As more than 20 countries are considered to be emerging markets and the performance of each of these countries’ shares and bonds varies widely, do your research if considering investing in emerging markets.
“In our view, investors hoping for a repeat of 2017 – when virtually all emerging market financial assets did very well- are likely to be disappointed in 2019,” said Barclays in its latest global outlook. “Emerging market financial assets in general are unlikely to have a strong 2019.”
China’s slowing exports are likely to be one of the challenges facing emerging market equities this year “but emerging market credit [debt] is likely to be more resilient”, according to Barclays.
Logistics could be one of the best-performing parts of the commercial property market this year, according to ASI.
“Logistics market conditions are thriving, particularly in fringe locations close to major conurbations where ecommerce is boosting demand,” said ASI in its latest European real estate outlook.
“There is strong demand for ‘last mile’ delivery hubs for retail goods bought online; vacancy rates are low and competition from higher-value land uses is limiting supply [of logistics space] too.”
ASI also believes that investors in private rented accommodation in major European cities could do well this year – particularly in Germany, Austria, Switzerland, Netherlands and the Nordics. It also expects investment returns on prime offices (typically offices based in major commercial centres and close to good transport links) in major European cities (such as Amsterdam, Stockholm, Berlin, Lisbon and Madrid) to be strong.
SHARES OF CARMAKERS
Concerns about the environmental impact of diesel and petrol — and plans to ban such fuel — have put many car manufacturers under pressure. “We’re wary of auto-stocks around the world because of the pressures on that sector,” said Andrew Milligan of Aberdeen Standard Investments. “From a European investor point of view, one of the big issues they need to think about in 2019 is diesel and slowing car sales.”
Barclays is not that keen on US consumer discretionary stocks (the stocks of companies which produce or sell goods and services that people want — but don’t necessarily need).
Davy, too, is cautious about consumer discretionary stocks. “We have cut exposure to consumer-discretionary stocks, such as luxury brands — as these are the things which people stop buying when things get slower,” said Alan Werlau of Davy.
European shares may not deliver the best returns this year. “EU companies have not been creating good profit growth recently,” said Milligan. “Then, on top of this, there are worries about Brexit and Italy [over its populist government]. Europe has certainly seen a big growth slowdown [in its economy] in recent months. European equities is not the most attractive of markets. One thing to watch this year is how well will the populist parties do — and what that will mean for the monetary union and the European economy.”
FTSE 350 and BREXIT
Uncertainty around Brexit continues this year — with investors watching if, and how, Britain will leave the EU. Investors in domestic-oriented British companies are likely to be badly burnt regardless of whether the UK Government can secure a deal with EU on Brexit or not, according to Werlau. “If you need to be in the British stock market, the Ftse 100 is the only place to be,” said Werlau. “Avoid the Ftse 350 or domestically-oriented British companies as these are likely to get hit more given the weak sterling.”
There are a number of possible Brexit scenarios that could unfold. One involves a deal between the UK and the EU on Brexit, another involves the failure to secure such a deal, and another scenario is where there is a second referendum on Brexit in which the UK votes to stay in the EU. “If a deal happens, the market will probably rally,” said Werlau. “Sterling will be stronger and people will be happy. That would be a relief — though short-lived. A lot of the uncertainty around Brexit has slowed business sentiment and hurt consumer confidence. Any euphoria that will come [after a deal] will eventually wear off. I wouldn’t expect a strong sustainable rally of sterling or of stock markets.”
Domestic-oriented UK companies would suffer the most in a no-deal Brexit, according to Werlau. “If there’s no deal, sterling will probably get weaker and it will stay weak for a while,” said Werlau. “The Ftse 100 would probably be okay and benefit from the weak sterling. Small- and mid-sized UK companies would probably get crushed at this stage. If we had a second referendum where the UK votes to stay in the EU, you’d get a rally. Sterling would firm up against the euro and the dollar.”
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