How to get ready for the year ahead

We look at ma­jor as­set classes go­ing into 2019

Shares - - CONTENTS DISCLAIMER - By Russ Mould AJ Bell In­vest­ment Di­rec­tor

One of this col­umn’s favourite mar­ket say­ings comes from fund man­age­ment leg­end Sir John Tem­ple­ton, who once as­serted that ‘Bull mar­kets are founded on pes­simism, grow on scep­ti­cism, ma­ture on op­ti­mism and die on eu­pho­ria’.

Ap­ply­ing this test can po­ten­tially help in­vestors spot where value and fu­ture up­side op­por­tu­ni­ties can be found and – just as im­por­tantly – avoid ar­eas which are so pop­u­lar they could be over­val­ued and ca­pa­ble of do­ing dam­age to port­fo­lios.

It is not easy to re­search an as­set class, coun­try or in­di­vid­ual stocks, or what may be suit­able funds, when no-one else is in­ter­ested. It is harder still to avoid those which ev­ery­one is talk­ing about with great ex­cite­ment. But 2018 pro­vided ex­am­ples of how it can help.

At the start of this year, the eu­pho­ria sur­round­ing cryp­tocur­ren­cies was all-per­va­sive. Bit­coin promptly lost 75% of its value.

By con­trast, de­fen­sive equity sec­tors were widely viewed with scep­ti­cism at the start of the year, amid wide­spread op­ti­mism re­gard­ing what was termed as a syn­chro­nised global re­cov­ery. But, us­ing the S&P Global 1200 in­dex as a bench­mark, health­care and util­i­ties turned out to be the best two per­form­ing su­per-sec­tors (out of 11). Fi­nan­cials and ma­te­ri­als (min­ers), both ex­pected to do well, did worst.

A quick look at 2018 may there­fore help in­vestors to spot value and dodge the traps that 2019 may of­fer.

DON’T LOOK BACK IN ANGER

First things first. This year has not been easy. None of the ma­jor as­set classes as a whole – eq­ui­ties, bonds, com­modi­ties – gen­er­ated pos­i­tive to­tal re­turns in lo­cal cur­rency terms. The pound’s drop boosted the value of over­seas earn­ings but apart from se­lect ar­eas such as tech­nol­ogy it was hard to find win­ners in 2018.

way as cycli­cals lagged and even tech­nol­ogy lost some of its shine in the sec­ond half, amid con­cerns over val­u­a­tion, reg­u­la­tory pres­sure, prod­uct cy­cles and whether growth fore­casts could be met.

To cap it all, any in­vestor who thought bonds would pro­vide cap­i­tal pro­tec­tion came un­stuck. In lo­cal cur­rency terms, only Ger­man govern­ment pa­per of­fered pos­i­tive to­tal re­turns and a dash for Europe’s ul­ti­mate haven as­set hardly smacked of con­fi­dence. Tighter mon­e­tary pol­icy and signs of wage in­fla­tion – plus fears over whether tar­iffs would nudge prices higher more gen­er­ally – took their toll.

THE WAY AHEAD

Anal­y­sis of those per­for­mance statis­tics means this col­umn cur­rently sees the ma­jor as­set classes like this as we head into 2019, us­ing Sir John Tem­ple­ton’s four phases as a frame­work.

Eu­pho­ria is a lot harder to find than it was a year ago. This in it­self could be a good sign for in­vestors, since good news sto­ries seem to be rel­a­tively few and far be­tween, at least us­ing fi­nan­cial cov­er­age from the main­stream press as a yard­stick.

That said, US stocks – and still tech stocks and the FAANGS in par­tic­u­lar – as well as growth and mo­men­tum styles are still pop­u­lar.

By con­trast, emerg­ing mar­kets – a con­sen­sus favourite in Jan­uary 2018 – are out in the cold af­ter the sum­mer rout. The loss of faith in bit­coin is now tan­gi­ble. Fi­nan­cial stocks are unloved af­ter a hor­rid year and fat yields and low mul­ti­ples of book value mean banks may pop up on ‘value’ screens – even if ‘value’ re­mains in­trigu­ingly out of favour.

But if in­vestors are re­ally look­ing for an area where pes­simism may mean value is avail­able, look no fur­ther than the UK, wracked as it is by the Brexit de­bate – al­though ad­mit­tedly you could have said the same at this time last year, to no great ef­fect. It will be in­ter­est­ing to see if the FTSE 100 con­founds its doubters in 2019 and be­yond whether a deal is struck with the EU or not.

Source: Refini­tiv data. Cov­ers pe­riod 1 Jan­uary to 13 De­cem­ber 2018

FEW AS­SET CLASSES YIELDED POS­I­TIVE TO­TAL RE­TURNS IN 2018 (THOUGH THE LOWER POUND HELPED)That may make in­vestors won­der whether we are still in a bull mar­ket at all. Fur­ther doubts creep in when they look at ma­jor stock mar­kets: not one beat cash in lo­cal cur­rency terms, though again a slide in ster­ling in­creased the value of over­seas share­hold­ings.

Source: Refini­tiv data. Cov­ers pe­riod 1 Jan­uary to 13 De­cem­ber 2018

AMER­ICA DID BEST OF THE MA­JOR MAR­KETS IN 2018 BUT LO­CAL CUR­RENCY RE­TURNS WERE STILL WEAK Equity sec­tor trends fur­ther ques­tion the bull mar­ket. As al­ready noted, de­fen­sive sec­tors led the

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