2019 – why returns should be positive and the challenges ahead
17 January 2019
Following a turbulent start to the year on global financial markets, volatility will persist throughout 2019, reflecting uncertainty as the Fed tightens monetary policy – but current stockmarket valuations will generate positive returns for investors, according to Tom Elliott, deVere Group’s International Investment Strategist.
Elliott says: “Was the fourth quarter sell-off a late cycle squall, that will correct itself? Probably. Or despite the recovery rally seen in early January, does it herald the onset of a bear market? Probably not.
“We will learn this year what the 13.3% fall on the MSCI World Index (in dollars) over those three months signified.
“But the underlying health of the US and global economies suggests global stock markets offer value at current multiples, and will generate positive returns in 2019.”
He continues: “What is apparent is that there has been a dislocation between underlying economic growth and corporate earnings, which are both generally good, and investor appetite for risk assets – which is weakening. Indeed, investor nervousness has spread into the banking sector, where three-month dollar libor rates ended December at 2.8%, the highest rate since the dark days of November 2008.
“The contradiction is easily explainable, it is being driven by Fed policy. 2018 was the first year in which we saw the Fed reverse its quantitative easing programs, through destroying $50bn a month of interest and capital repayments being received on its bond holdings.
“This, together with a well-announced program of interest rate hikes, is testing investors’ faith in the Fed’s ability to ‘normalise’ US monetary policy without tipping the economy into recession.
“And yet the US economy, while now growing at a slower pace than in the summer of 2018, is headed for perhaps 2.3% GDP growth against the 2.5% of 2018 according to the December forecasts from the Fed. The one-off tax cuts of December 2017 that gave such a boost to US disposable income last year will not be repeated, but unemployment – already at a multi-decade low – looks set to fall still further, which will support consumer spending.”
Elliott adds that is important to remember that should the US economy falter, the Fed will have room to reverse policy and that inflation is modest, at 2.4% using the Fed’s preferred measure.
“Fed chair Jay Powell has made it clear in recent weeks that the central bank will be flexible in its approach. This has been treated by the market as a sign that interest rates may peak in the current cycle, at a lower level than forecast in September.
“Indeed, those who fret over other central banks also tightening monetary policy too soon forget that the ECB and the Bank of Japan can also reverse course and increase their monthly asset purchases.
“Treasury bond yields have fallen in response to Powell’s more conciliatory remarks, so increasing the relative attractiveness of dividend-paying, defensive stocks. A trend that is likely to persist in 2019 as investors continue to fight shy of riskier assets that are subject to the greatest volatility, rediscover dull but worthy value stocks with good dividend cover.”
Elliott concludes: “Therefore it’s my belief that we are not facing the start of a bear market. Yet there are big risks for 2019 including a possible eurozone recession, an escalating US/ Chinese trade war, a recession in China and a hard ‘no-deal’ Brexit.
“Against this backdrop, portfolio diversification will remain a key investment strategy.”
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