Investment Outlook: Why was 2018 such a difficult year and what does 2019 hold in store?
Given recent political and economic uncertainty, it is unsurprising that many people are questioning what this means for their money and what if anything they should do right now. We asked Owain Kember, Investment Director with Quilter Investors, to share with us some of his thoughts.
Why was 2018 such a difficult year for investing and what does 2019 hold in store?
‘2018 was punctuated by a high level of volatility and some brutal market sell-offs in the first quarter, as well as in October and December. These were caused by economic concerns, such as the future path of US Interest rates, as well as heightened geo-political tensions such as the US-China trade war and Brexit.
This created an environment in which reducing risk by diversifying across different assets was exceptionally difficult and 2018 proved to be one of the worst years on record for the wide range of asset classes that posted a negative return’.
Source: FE Analytics, from 01/01/2018 to 31/12/2018
What is your outlook for this year and how are you positioning your funds?
‘In 2018 most major equity markets experienced their worst one-year decline since 2008, while US equity markets experienced their worst December in 50 years. We are therefore currently asking ourselves:
- Are markets correctly anticipating the inevitable end to the second-longest expansion in history, but doing so earlier to avoid the complacency that defined the years before the financial crisis?
- Have markets over-reacted as they did in 2015-16?
Given the recent relatively positive economic data, we do not foresee an imminent recession or global financial crisis, just moderated global growth and corporate earnings, with pockets of volatility, which is normal at this late stage of the economic cycle. This view is shared by many leading market participants.
We remain confident of a recovery in share prices, as the sell-off has been severe although we recognise that we are also in the later stages of the economic cycle. Consequently, we intend to maintain the current asset allocation in anticipation of a recovery but recycle a portion of equity rallies into more defensive asset classes’.
With an increasing focus on costs, why choose an actively managed fund rather than a cheaper passive fund that will simply track general market movements?
‘The Cirilium portfolios have active and passive ranges that both aim to deliver good outcomes for clients at a given risk level over time. However, the active range will use the widest investment toolkit to access the best-in-class fund managers globally, across a variety of different asset classes (for example equities, bonds, alternatives and cash) and through a variety of different structures to achieve its returns over time.
The passive range will simply track the general market direction and therefore might have less exposure to markets such as the emerging economies.
The wider toolkit should mean that over time, the active range is likely to have the greatest capability for outperformance of the market but there may be times when there is a dominant trend in a specific market, e.g. as we saw last year with US Technology, which might lead to solid performance from passive investments’.
Why is the performance of just a few American technology stocks such as Facebook, Amazon, Netflix and Google so important for investors?
‘The so-called “FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google) are important for investors as they comprise roughly 13% of the US benchmark S&P 500 Share Index and in the third quarter last year were collectively valued at $3.8trillion – almost 50% larger than the entire value of the FTSE 100!
An active US fund manager might find greater opportunity in small and medium sized companies and avoid investing in these “mega-cap” companies altogether. While an investor in a passive strategy, which will simply track the US market, will inevitably have significant exposure to these companies as they are major constituents within the benchmark S&P 500 Share Index.
The US market was dominated by the FAANGS in 2018. They led the US market higher during the first half of 2018 and might have accounted for as much as 75% of the first half 2018 gain of the S&P 500 Index.
However, there were widespread concerns about how these companies could justify such high valuations and the market punished these stocks the hardest in the subsequent sell-offs from October onwards with the result that they collectively lost $1trn in value, which is just under half of the total value of the UK’s FTSE 100 Index.
Analysts are now reassessing what are the realistic rates of earnings and sales growth for the FAANGs and it is important for an investor to understand how much exposure they have to them in their portfolios’.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
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