Investors will need to weather more volatility in order to capture opportunities in 2019, according to the Year Ahead report from UBS, the world’s leading wealth manager.
Global economic growth will decelerate next year to 3.6% from 3.8% in 2018, and company earnings will grow at a slower rate.
However, a 2019 recession still looks unlikely, and the price of many financial assets has already moved to reflect uncertain prospects.
UBS Global Wealth Management’s Chief Investment Office (CIO) enters the year with an overweight position in global equities.
However, as the market cycle matures, investors should diversify and hedge their portfolios to guard against volatility as well as political and other risks. They should also take advantage of growth in fields like sustainable and impact investing, and pockets of value where financial asset prices are excessively low.
“Investors should retain positions in global equities but plan for market volatility. A slight slowdown in economic and earnings growth doesn’t mean no growth, and the recent sell-off has left a number of assets more attractively valued, but investors must also take into account the tense geopolitical environment as well as monetary policy tightening,” Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, says.
Though it didn’t quite deliver the political bombshells of previous years, 2018 was a notable year for financial markets as heightened US-China tensions, tighter monetary policy, and a maturing global cycle contributed to more turbulent conditions.
So, what can we expect in 2019?
The investment environment is clearly becoming more challenging as the global economic cycle matures. With economic growth, global politics, and central bank stimulus all at turning points, volatility has risen and drawdowns are becoming more commonplace. Investors should expect more of the same in 2019, as markets begin to try to anticipate an end to the cycle.
Challenge 1: Investors are looking to the end of the cycle.
Slower growth and tighter monetary policy
We anticipate slower global economic growth in 2019. US growth will be dented because taxes are not going to be cut again. Meanwhile, China faces tariffs on its trade with the US and needs to control its rising debt. Tariffs will have knock-on effects for its suppliers, including those in Europe.
Monetary policy is also tightening.
Solution 1: Stay invested
It’s been over a decade since the financial crisis, and stock markets are becoming more volatile. But we aren’t expecting a recession in 2019. So we think this is still a market in which investors should maintain a healthy allocation to equities. And in any case, trying to time the market tends not to pay off over the long term.
Challenge 2: Earnings growth outlook is weak
Weaker overall earnings growth
Companies are unlikely to grow their profits as quickly in 2019 as they did in 2018. Meanwhile, we expect about 9% earnings growth in emerging markets and around 5% in the Eurozone.
Solution 2: Be selective
Economic and earnings growth are waning, but this slowdown will not be felt uniformly across every country, sector, or company, and there are still growth opportunities and pockets of value.
Challenge 3: The world faces key political turning points
Political challenges span the globe. US-China tensions look like they run much deeper than disagreements about trade policy. And we face elections of note in India, South Africa, Greece, Canada, and Argentina.
Solution 3: Diversify
While some risks, like a global trade war, bear close monitoring, concerns about individual countries usually don’t upset global markets as a whole. By diversifying across a range of regions and asset classes you can reduce risk. Diversification means spreading your money across many different investments, across regions, asset classes, and companies, rather than sticking with just a few.
Challenge 4: The world continues to use resources in an unsustainable way
Environmental credit crunch
The world continues to use resources in an unsustainable way, which is becoming an issue for financial markets as much as for the environment and society. Social media means corporate behavior is more closely scrutinized than ever, and companies have come to appreciate that consumers can vote with their wallets. Read on to learn how to invest in line with your values.
Solution 4: Go sustainable
Investors can play a role in improving sustainability while earning comparable returns to equivalent traditional investments. For example, investors could take advantage of the fact that a wealthier world is willing to spend more on such ecological goods as better air quality for its children. There is plentiful evidence that sustainable investing does not hurt your portfolio.
Challenge 5: Long-term returns are going to be lower
Limited long-term return potential
After a decade in which stock market returns have vastly outperformed economic growth and central banks have provided unprecedented support for bonds, the return potential for the future is now more limited. It’s important not to ignore these changing long-term prospects. You will need to keep this in mind when building financial plans for the future.
Solution 5: Plan for the unexpected
Life’s unpredictable; things don’t always turn out the way you’d like them to. What happens then? It’s this uncertainty that makes long-term financial planning so important.