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What lies ahead in 2019?

03 January 2019

5 minute read

We look at what 2019 might hold for investors, from leaving the EU to the 2020 Presidential Elections, and the prospect of another recession.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What 2019 might hold for investors.
  • The outlook for the UK, Europe and the US.
  • The likelihood of another recession.

The future is profoundly unknowable from our current vantage point. Yet investors may be wondering if recent stock market turbulence is set to continue, with several political and economic headwinds that may fuel further volatility and fear of a global slowdown.

Yet mostly, we lack the imagination to see the future as anything other than a continuation of the recent past. The doomers perpetually visualizing the next recession mostly seem to describe something suspiciously like the last, but always worse of course.

For our part, we see few signs of the next recession on the horizon. We also doubt that the next recession will be similar to the last, either in scale or scope. The sectors of the economy at the epicentre of the last economic bloodletting, namely the US consumer and the world’s banks, look in much more robust health now. The debt-to-income ratio in US households is now at a 40 year low, compared to a 40 year high in 2006/07. In any case, the experience of the last century would tell us that recessions of the like the world suffered in 2008/09 are very much the exception, not the rule.

Nonetheless, the reputational allure associated with repeatedly predicting recessions (the more dramatic the better), allied to the fact that this US economic cycle is poised to become the longest since the mid 19th century, should keep the next downturn very much front and centre for investors in 2019.

UK

For those in the UK, Brexit will continue to dominate the airwaves. If some form of withdrawal agreement is struck, the debate will move to parliamentary arithmetic for that deal. If that test is passed, then the many items that have been kicked into the long grass of the transition period will then have to be faced by negotiators. If not, then the unknown of hard Brexit will likely see both the UK economy and its related assets in for a more hair-raising time for a while.

As noted before, the intrinsic value of the stocks quoted on the UK’s exchanges tends to have little to do with the UK economy. However, sterling traders will feel differently, and the currency’s related tribulations would temporarily shape related portfolio returns. The broad geographical and sectoral diversification inherent in our strategic asset allocation will likely prove an investor’s best defence in such an eventuality.

Europe

The UK’s tortuous exit from the EU will probably remain quite far down the list of concerns for policymakers in Continental Europe. Following elections to the European Parliament in May, nearly all of the most important leadership positions across EU institutions will turn over. New presidents of the European Commission, the European Council and the European Central Bank will be appointed. The political hue of the European parliament will obviously be important here.

US

On the other side of the pond, the partial US government shutdown entered the new year, with President Donald Trump’s border wall standoff with Congress remaining unresolved.

November’s midterm elections handed control of the House of Representatives to the Democrats, granting them control of the legislative agenda alongside significant investigative powers, if they choose to wield them. On the other hand, with the senate in Republican hands, the President should still enjoy discretion over Federal judiciary and cabinet appointments.

Much of what we will see politically in the next two years looks likely to be signalling for the 2020 Presidential elections. Healthcare was the theme of a very disciplined Democrat campaign, suggesting this will feature high on the House agenda. For the markets, there are risks for sure. Presidents stripped of control of the legislative agenda in the past have often pivoted to areas where executive power reigns supreme, such as foreign policy and trade. Meanwhile, the debt ceiling due next year may provide a more difficult scuffle than the last few deadlines, with congress now split.

For the all important US economy, we should see some of the fiscal sugar high of this year fade and inflationary pressure continue to gather, perhaps aided by more tariffs. It will continue to be all eyes on the Federal Reserve as the central bankers try to feel their way to an appropriate interest rate for the US economy, no doubt under significant political pressure.

At the other end of the central banking scale, we may also see the first ECB rate rise in Mario Draghi’s eight year tenure as ECB President in 2019, but in the second half and likely only just before he hands the baton over to the as yet undecided successor. Our hunch remains that underlying trends in the European economy are healthier than widely feared. As the region’s car manufacturers move on from the troublesome transition to new emissions testing standards and an eventual compromise is found on Italy’s budget, we expect some of this discount to reality to fade. European stocks should benefit.

Investment conclusion

Again, the warning for investors is not to go into your shells and run from stocks too early. There is no fixed length for an economic cycle and no relationship between a cycle’s length and the recession that ends it. Though the pessimists (will always) sound more rigorous, more sensible even, their prescribed asset allocation medicine is generally poison for portfolio performance amidst a world where growth will likely continue to be the norm, not the exception. Of course, humility, and its investing counterpart diversification, remains appropriate in the face of all that we can’t possibly know about the future. If the next recession hits tomorrow, our portfolios will not face it constructed as a reckless all-in bet on a glass half full view of the world.

However, the indicators that have been of some use in the past continue to tell us that this already elongated economic cycle has room to run yet. This suggests that well diversified portfolios should continue to lean gently towards stocks in both emerging and developed worlds, over high quality bonds.

We will continue to use the strength that we still see coming in the world’s equity markets to reduce this lean over time.

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