Spreading your bets
This year’s winners and losers are hard to predict Tom Stevenson
Last week I looked back at 2018. That was the easy bit of the year-end Janus job. Now for the more challenging task – looking forward into the mists of 2019.
The good news is that I’ve already done the work. Each year at this time, my quarterly Investment Outlook looks ahead to the next 12 months – if you are at a loose end at lunchtime on Jan 9, please do join me for a live online question-and-answer session (details below).
The bad news is that preparation for 2019 has been unusually like fixing the plane mid-flight. December’s volatility made it even more difficult than normal to finalise the outlook. Some markets have already fallen through the bottom end of expected 2019
ranges. That’s painful, but it makes it easier to be more positive about this year’s prospects in some cases.
The most extreme example of this is the US stock market, where the S&P 500 index started December at 2,760 and ended the shortened Christmas Eve session at 2,351, a 15pc fall in three and half weeks. That was 150 points below Goldman Sachs’s “bear case” forecast for the end of 2019 (the base and bull cases were 3,000 and 3,400, by the way, after an expected 2,850 close to 2018).
It’s not for me to criticise the US bank’s forecasting ability (although it does rather suggest that putting a number on an index a year, or even six weeks, out is a mug’s game). Rather, I’m observing that the investment calculus has been thrown up in the air by the gyrations of the past three months or so.
In particular, the US is no longer the valuation outlier that it has been. At around 14 times expected earnings, Wall Street is not expensive as long as you continue to believe that earnings growth will remain positive. The
current expectation is that 2018’s tax-cut-fuelled growth of 20pc plus will fall to less than 10pc. That would more than justify today’s lower valuation multiples.
Of course, there are plenty of ifs and buts around those forecasts. Top of the list are how the trade war with China pans out and whether the Federal Reserve continues to tighten monetary policy at its current rate. If recession can be averted until 2020 or later then the US will enjoy its status as one of the world’s more defensive markets. The valuation argument for sticking with shares is even more
compelling elsewhere in the world. Most obviously, British shares are cheap as we enter the final three months of the Brexit countdown. With the FTSE 100 index now yielding nearly 5pc, and shares costing only around 10 or 11 times expected earnings on average, the odds are stacked in favour of a decent return over the medium to long term.
You’ll notice that I’m saying nothing about the next six months or so. I have absolutely no idea how Britain’s exit from the EU will be resolved, although I wouldn’t bet against the can getting kicked some way beyond March 29.
But investors should not concern themselves with short-term political developments. What determines long-term returns is the price you pay, and that is now low enough for investors to hold their noses and jump in.
My other favoured market in 2019 is Japan. Here, too, valuations have fallen to attractive levels as share prices have tumbled while earnings forecasts have held up. The Topix index hit 1,911 in January and closed as we were waking up on Christmas Day at just 1,416. If the
world is really heading into recession, you won’t want to be heavily exposed to a major trading nation like Japan.
But, priced more cheaply than they were six years ago, Japanese shares have more than factored in the bad news.
With trade dominating the agenda, I’m a little more cautious about bargain hunting in emerging markets, especially in the rest of the Asia Pacific region outside Japan. But here too, the terrible performance of shares in 2018 makes a strong case for gritting your teeth and going for it.
The MSCI emerging market index fell from 1,273 in January to just 936 in October, a 26pc fall. Since then it has moved sideways while the developed world has taken a bath. That might be telling us that the storm has passed for emerging markets. With no obvious reason to favour one region over the
‘I have no idea how Britain’s exit will be resolved. But short-term developments shouldn’t concern investors’
others, I’m happy to accept that the winners and losers in 2019 cannot be predicted from here. I will stick to my tried-and-tested approach of spreading my eggs around a wide range of baskets.
That’s also true when it comes to allocating between different asset classes, although my clear preference after the past three months is for shares.
With the Fed likely to ease back in 2019, if not pause its tightening altogether, I don’t expect Treasury yields to rise much above 3pc. If bond prices remain stable in that environment, this will be a competitive yield so fixed income should remain a decent diversifier in a balanced portfolio.
Commodities, like shares, are starting from a low base, with the oil price having already priced in a less favourable supply-demand balance.
Property on the other hand, whether commercial or residential, looks unattractive this year. The yields on prime real estate just don’t compensate for the capital risks, especially in retail where the bloodbath will continue in the new year, I suspect. Meanwhile, my daughter doesn’t need to worry about house prices running away from her in London for a good few years. She can keep topping up her LISA for a while yet.
Happy new year, and here’s to a better 2019. You can join my annual Investment Outlook webcast at noon on Wednesday Jan 9 at fidelity.co.uk.
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63