What’s in store for global investment markets in 2019?

Andrew Milligan

As we start a new year, it’s natural that you might want to review your finances. So what should you watch out for when it comes to investment markets? Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, shares his thoughts on the important signals to watch for over the next 12 months, as well as his resolutions for the year ahead.

Trade, technology and financial tensions

The list of things to pay attention to in 2019 is already looking quite long. But two issues do stand out: whether the trade and technology tensions between the US and China spiral into a major breakdown in their relationship, and whether the political and financial tensions being seen across the European Union (EU) escalate into more problems for the European Economic and Monetary Union. Although there was good news on both fronts at the end of 2018, neither issue has been settled.

Key economic issues to keep an eye on

Throughout 2019 we’ll also need to pay attention to some key economic issues:

  • Will the US Federal Reserve raise interest rates too much?
  • Will inflation accelerate unexpectedly in any of the major economies as labour markets have more jobs than workers?
  • Will China manage to control its economy and ensure some recovery?
  • And, finally, can companies resist the squeeze on profit margins as costs rise?

The US dollar will also be important to watch. If it stabilises or even falls back against its major trading partners, this will probably be a decent year for investors. But if it continues to rise sharply this might have a negative impact on stock markets. This is because a strong dollar can be bad news for US companies which do a lot of business overseas.

Brexit blues – the real impact on markets

Brexit is obviously going to be a focus in 2019, although the range of possible outcomes is still quite wide. While they partly depend on political decisions in the UK and EU, they also depend on the time it could take the UK government and businesses to make some important commercial decisions.

So far, the main impact on markets has been the increased volatility of UK assets, including equities (stocks and shares) and the pound. Over the next few months we expect the pound to continue to rise and fall sharply in response to news from Westminster and Brussels, which in turn will affect the valuations of companies listed on the FTSE® 100 and FTSE® 250 Indices against their global counterparts.

Despite the market falls caused by Brexit at the end of 2018 that have brought the level of the FTSE® 100 Index back to almost what it was at the beginning of the millennium, it’s very important to remember that if you have shares in companies, these will usually give you dividends, which build up over time. To put it simply, if you’d been invested since 2000, and reinvested your dividends, you’d have doubled your money. Remember though that past performance isn’t a reliable guide to future performance. Also, the value of all investments can go down as well as up and may be worth less than was paid in.

It’s dangerous to pay too much attention to short-term volatility in political news, the pound or markets. The key issues facing the UK are:

  • whether political uncertainty means slow economic growth, or
  • whether external factors, positive or negative, create conditions where UK firms can take advantage of profitable global opportunities, or
  • whether businesses hunker down because of a major downturn in the global economy

Profits trump politics

At Aberdeen Standard Investments, our watchword is ‘profits trump politics’. For understandable reasons, there’s so much focus on political issues both at home and around the world at present. But we mustn’t forget the underlying economic factors that have an impact on markets. For example, will companies continue to drive positive profits growth, will inflation remain contained and will positive employment growth support consumer spending?

Although 2019 isn’t expected to be a year of very rapid growth, we certainly believe there’s a wide range of attractive investment opportunities if political uncertainty dies down.

There are both challenges and opportunities

Many investors understandably ask whether the current investment cycle, which has been characterised by mainly rising markets, is coming to an end. There are some amber warning lights, such as the political tensions between the US and China, and the pressures on companies and countries which have high levels of debt as a result of higher US interest rates. On the other hand, there are few of the normal signals and imbalances that generally suggest a major downturn ahead.

At the end of 2018, investor surveys showed quite a lot of pessimism and confusion. So this could be a time to look for investment opportunities. Valuations of various different assets did improve a lot in 2018, especially emerging market equities and bonds, as well as some unloved sectors in developed country markets such as financial companies and companies which sell products or services that are more popular when the economy is strong (known as cyclical stocks).

While we see this cycle as quite mature, we don’t think that it will necessarily end soon. There have been two major slowdowns since the 2008 crisis, and this third one doesn’t need to be the final one – as long as politicians and central bankers don’t make major policy errors.

Investment resolutions for the new year

My main resolution is the same as last year – to read less about Brexit! The UK is only 2% of the world economy and there are more important issues out there.

I also find it useful to think about investing in the same way as spring cleaning or tidying the garden – it makes you feel better when you’ve done it.

So it’s a good idea to spend time looking at the – messy or clean – investments and savings you’ve gathered together. Why is each one there? Does it need pruning or adding to? Does your overall portfolio look balanced or does it look unwieldy? Regular investing can build up over time, but it’s important to know your objectives – don’t get pulled along by what others are doing, or hold onto the winners for too long.

On a more personal note, some friends of mine have unexpectedly died in recent weeks leading me to acknowledge that investing and savings are only means to an end. So don’t forget to spend your hard-earned money and enjoy life – especially with your nearest and dearest. Happy New Year!

The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. The information here has been provided by Aberdeen Standard Investments and is based on their understanding in January 2019.