With stock markets in the UK, Europe, Japan, Asia and emerging markets all suffering double-digit declines and few non-equity asset classes offering positive returns, 2018 proved to be the worst year for investors since the onset of the global financial crisis in 2008. So as we start 2019, what lessons can be learnt from last year?
Andrew Shaw, a member of the Smart-IM investment committee, notes the fact last year was the worst year for returns for a decade says as much about how good the last 10 years were for investors as it does about 2018.
“Nonetheless, after many years of rising markets, a return to more levels of volatility felt painful for investors,” he says. “Fixed interest also struggled across the year, under pressure from rising rates in the US and concerns that quantitative tightening would remove buyers from the market.“
Indeed despite a strong rally in the fourth quarter of the year, Shaw notes that even gold failed to produce positive returns in exactly the type of conditions many investors would want to have held it.
However whilst there proved to be few hiding places for investors in 2018, Shaw says the scale of the falls were very much those of a market correction, rather than a market crash.
“What is interesting is that many of the larger issues which concerned investors at the start of 2018, remain at the forefront of their thinking now and continue to drive markets,” he adds. “One such issue is US interest rates.
“It is not unusual for investors to worry about rate rises at this stage in the cycle, with their main concern being that the central bank in question will overshoot the appropriate level and choke off growth, and such worries will typically abate when rates peak.”
While this time around is no exception, Shaw says while markets remain twitchy about the issue, there is more clarity now than there was 12 months ago. However, he adds the same can’t be said for other events taking place, in which investors are little better off today than one year ago. One such problem is the US/China trade war.
“This time last year Donald Trump was just getting started but, with the scale of his actions exceeding what most had expected, the outcome is less predictable than ever, as it is unclear whether this is indeed a trade war or whether trade is simply the first salvo in a larger battle for control of the globe.”
Meanwhile, Shaw notes the outcome of Brexit is arguably less certain than it was 12 months ago, with almost any outcome, from leaving without a deal to staying in the European Union, now seeming possible.
“Therefore, investing in UK assets comes with a huge ‘known unknown’ and, with such heightened risk, it is no surprise that many investors have shied away from them,” he says.
As a result, Shaw concludes whilst 2018 provide insight on some subjects, the issues of January 2019 don’t feel that different to those of January 2018.
“What 2018 did provide is a reality check that may yet prove to be helpful at this stage in the cycle, possibly avoiding the euphoria on which Sir John Templeton famously said bull markets die,” he says. “With asset prices at more reasonable levels and the global economy still growing, albeit more slowly, is it possible that this cycle has further to run.
“However, there is no doubt that, with investors having a somewhat bearish mindset currently, downside risks have increased as has the chance that this is in fact the beginning of the end for this economic cycle.
“Therefore, as we start 2019 we remain highly diversified and focussed on assets that we believe can offer more defensive characteristics in the event of a downturn, notwithstanding that no asset guarantees, as we saw with gold last year.”
