Market review – lessons from a volatile year

Andrew Milligan

2018 has been a year of dramatic announcements. From trade wars and political uncertainty to plummeting tech stocks and heighted market volatility, there’s been plenty to keep investors on their toes. Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, talks about the key lessons, answers the big questions and discusses what Santa could have in store for investors.

The V word – volatility

We can’t talk about 2018 without mentioning volatility – it’s been present throughout the year and was heightened sharply in the spring and autumn. But we must remember that 2017 was actually quite an unusual year because market volatility was very low, so the two corrections we saw in February and October 2018 weren’t a great surprise.

There are a few reasons for the market volatility we’ve seen. Firstly, there’s been a steady tightening of global monetary conditions – this comes after a decade of central banks stimulating the economy, indirectly supporting bond, equity and property prices. And of course, there’s been political sensitivity on a global scale, with a whole range of issues worrying investors.

But the real question investors should be asking is – what is this volatility telling us?

At Aberdeen Standard Investments, we suggest this volatility tells investors that they may need to alter their style and approach. We think greater use of diversification where possible, for example alternative or private assets, and more stable if lower yielding assets, such as cash in portfolios, could balance out a portfolio.

Looking ahead, we expect to see just as much volatility in 2019 as we have this year.

Can FAANGS bite back?

As we approach the end of the year, some of the top tech companies, commonly known as the FAANGS (Facebook, Apple, Amazon, Netflix and Google/Alphabet) continue to come under pressure, leading many to ask if the tech boom is coming to an end. This is an important sector that we’ve thought carefully about and conclude that many tech stocks face downward pressures.

They were supported for many years by a combination of low taxes, low regulation and limited competition as they bought or out-stripped slower growing rivals. Now we think there are signs that some of these technology giants are becoming victims of their own success.

In a competitive market environment the super-normal profits they enjoy would normally attract the attention of rival companies. Instead, their profits are attracting the attention of regulators and governments, with a series of tax or regulatory changes being discussed.

Their successful track record has also resulted in overly exuberant investor sentiment, over-investment and expensive valuations – which are all changing. So we don’t expect a calm backdrop for many of these tech shares during 2019.

Lessons learned

Each year teaches investors something new. Lessons learned in 2018 depend on the type of investor you are. Some would include the need for a more dynamic or tactical approach to investing, taking advantage of the sharp movements we’re seeing, using cash holdings to your benefit.

For more patient investors, then the lesson would be to invest more in private (not publicly traded) or alternative assets such as real estate, in order to get some diversification benefits. But of course that means giving up some liquidity in exchange – these are by their very nature long-term investments.

The big question for 2019

The $64 trillion dollar question is whether the world economy is going into recession in the foreseeable future. Our view is not – unless politicians and central bankers make big mistakes.

Financial history tells us that equity markets may suffer corrections during the end stage of an investment cycle, but the pain only comes from a sharp collapse in business profits. At present there are just some amber warnings for investors to monitor, from areas such as US monetary policy, debt levels in certain countries and sectors, or the political tensions between the US and China.

At the end of the day, we believe the bull run can continue as companies deliver positive profits growth in 2019. That’s why we continue to have a mix of global equity markets in our portfolios – alongside some safer assets to prevent undue declines.

Is Santa Claus is coming to town?

We might hope to see a small Santa rally, where stock prices rise in the month of December – but for now, the gift we’ll find in our stocking come Christmas Day looks rather small.

The UK stock market is, of course, being affected by the Brexit debate. Looking at global equities, although we did see a combination of factors encouraging investors to put their cash to work in December, such as a more cautious Federal Reserve and the Organisation of the Petroleum Exporting Countries (OPEC) taking action to stabilise oil prices, sadly the discussions between Presidents Trump and Xi rather fell apart after an initially good meeting at the G20 – leaving markets even more concerned about the relationship between these two important countries.

When a lot of bad news has been priced into the markets, then they’re usually ready for a short-term rally. However they need a suitable trigger, some form of stimulus. Looking into 2019, investors will need to assess whether actions from the US, China or OPEC speak louder than words; do politicians follow through with their promises?

Opportunities in the New Year

When it comes to investment opportunities for 2019, we like several areas for different reasons. The outlook for positive company cash flow, dividend payments and share buybacks supports many global equities – especially in emerging markets, Japan and Europe, and to some extent the USA.

In a world of low interest rates, income opportunities include European real estate, some developed markets such as Australian and US bonds and especially emerging market debt.

Remember though, we have cautioned about the presence of significant levels of volatility in markets, so it’s important to have diversifiers. These include safe haven currencies such as the Yen and safer bonds such as US inflation-linked debt. Or for the simple investor, a higher than usual cash weighting could provide some counterweight in their portfolio – and an option on buying attractively valued opportunities when they appear.


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 December 2018.