Having started with a strong rally in equity markets, 2018 ended with almost all equity markets showing significant losses. Why such a U-turn in sentiment? Well, investors became increasingly worried about a slowdown in economic growth, coupled with tighter policy and the end of asset purchase programmes leading to weaker corporate profits. They took money out of equities and moved into what they perceived as safe havens – such as government bonds and gold.
So we start 2019 with most markets at lower levels and many investors feeling pretty rattled. But this move had, been well signposted as we had repeatedly warned. That was why we had been progressively de-risking our portfolios throughout 2018 and before. It is fair to say that we had not anticipated the speed of the move, but we have certainly mitigated the impact upon our clients’ portfolios. Bluntly, though, what matters now is less about what has happened than it is about what is likely to happen from here.
Equity markets are already pricing in a significant slowdown in growth and a resulting fall in corporate profits. As we are nearing the end of the business cycle, neither of these should be unexpected. But we remain of the view that there will still be growth this year, just slower growth. So there will still be opportunities for companies to make money. This is emphasized by the good data coming through – Friday’s US jobs data being a very good example of this. Our view is that there will continue to be a mixture of data coming out. And this data is likely to lead to further swings in sentiment and a continuing high level of volatility. We’ve seen it many times before and it’s not ‘different this time’.
Equity markets are already up some 5% from their lows and, from these levels, we expect to see something of a rally in the early months of this year. After the recent turmoil that would be very welcome. But remember, the risks have not gone away and the overall picture is unchanged. Having de-risked it seems very brave to put money back into equities in the hope of micro- timing an entry point and capturing a short term bounce. Now, that may be different for investors with large cash positions who are looking to enter the market, but in all cases do please look at the risks and not just the possible returns. For us, a short term rally would makes us think about a continuation of our programme of de-risking.
A final word on so called ‘safe havens’. Gold is not one of these – it is a higher risk asset. Yes, it may move upwards as equity markets plummet but that does not make it safe. The only real safe havens are short dated government bonds and cash. And the returns on those are dismal. So there’s your choice – dismal returns and get your money back, or better prospective returns and a risk of capital loss. We remain cautious but you pay your money and…
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