Investments in 2018 were characterized by challenging conditions in almost all markets and investment regions, despite a relatively robust global growth. This apparent contradiction could be explained by constant pressure on markets due to escalating trade tensions, geopolitical concerns, difficulties in the emerging markets, and the Fed’s accelerating monetary policy.
While global growth is expected to slow down in 2019, investors should still find selectively attractive buying opportunities in specific market segments with strong fundamentals. For example, the USA: Despite the recent downturns after 9 years of the bull market, which signal the end of the cycle and prepare investors for increased volatility, the market environment and earnings momentum are intact, which should lead to outperformance of selected stocks, at least in the short to medium term.
A decisive aspect role could be played by the major central banks. If the FED will, after this year’s rise in interest rates, continue to tighten the interest rate screw and to reduce QE next year, remains open in light of the market turbulences and the dependency of local retirements schemes from rising markets. ECB and BOJ will most probably maintain their more cautious approaches without interest rate hikes.
In the US-China trade conflict, one can only hope that sanity will gain the upper hand, since the economic and political costs of a downward spiral of reciprocal retaliation are extremely high. And Trump’s ambitions for re-election in the presidential elections in 2020 might lead him to accelerate trade deals with both China and the EU, in order to avoid being seen as the president who has led the world into a global recession.
More than just reason will be required to regain investor confidence in EU markets as the March deadline for Brexit approaches. Meanwhile, the EU faces even more existential crises, such as the populists in the Italian government and additional populist tendencies in other countries, including now also France. However, in 2019, many bad news could be embedded in the European stock markets such that – if the worst scenarios can be avoided – attractive buying opportunities could emerge in the second half of the year. Indeed, Europe could then stabilize or accelerate, while monetary and fiscal stimuli in the US could increasingly fade and higher interest rates could tend to slow growth there.
EM equity valuations are at about the same level as in 2003, with consumer and technology stocks in particular being lower valued than their developed market counterparts whereby a selective choice becomes interesting.
The major focus in 2019 will be China and its growing importance in capital markets which many investors consider as an own asset class, in order to better manage both the chances and the risks. China`s long-term, consumer-driven growth story is intact and compelling, valuations are attractive after the decreases in 2018, and major indices plan to significantly increase the share of Chinese equities which will lead to larger capital flows to China due to rebalancing of fund managers. On top the Chinese government has already announced budget measures to support the economy with fiscal and monetary stimulus, if necessary.
At the same time, however, volatility will also increase as a result of intensified competition with the USA. The US clearly intend to prevent China from increasing its competitive advantage in growth areas like AI, quantum computing and biotech, which represents a fundamental change in the trade relations between the US and China and could have severe repercussions on politics and markets.
In summary, the maturity of the current investment cycle and the above mentioned risk opportunity ratios suggest a more cautious and vigilant investor position in 2019. Active management, selective hedging and dynamic repositioning between investment vehicles and markets should be the key to a successful investment strategy in a volatile and challenging investment environment.