As the end of 2018 approaches, we reflect on a turbulent year in markets and consider what 2019 may have in store for investors. This year, the investment sphere has been dominated by political change, resulting in high levels of volatility and the spreading of risk-off sentiment within markets. Despite political pressures, global growth remains strong going into the new year, however the outlook for 2019 remains much more mixed, with the IMF recently cutting its growth expectations from 3.9% to 3.7% on the back of trade tensions and rising geopolitical risk.
Going into the final weeks of the year, the global economy is heating up. Main global economies including China, the US and the UK are all showing signs that the end of the prolonged period of expansion experienced in recent years is now on the horizon. With the end of the economic cycle drawing closer, an acceleration of monetary policy tightening and increased volatility in markets is leading expectations for a structural market correction in 2019 that will make what happened in October 2018 look like a mere blip.
Despite the expectation of a mid-2019 correction, for the remainder of 2018, the global economy remains healthy, with a number of world economies still showing potential for further growth. The investment outlook differs between geographical areas, however, on the whole, opportunities remain for investors to gain substantial returns from growth assets in the near term.
In the UK, performance has been hampered by political risk associated with Brexit in 2018. Despite the doom and gloom reported in the media, the UK economy is currently relatively healthy, with low unemployment, strong wage growth and low inflation all supporting the consumer. With expectations for 2019 being largely dependent on the ‘deal or no deal’ situation, the outlook differs by the investment horizon. At this point, a deal is likely to result in a relatively soft Brexit which would provide a boost to UK equities, however also increase the rate of tightening from the Bank of England. A no-deal situation would likely result in a sell-off of UK investments and sterling. Opportunities remain going into the last months of the year. However investors should choose UK exposure carefully going into 2019 with a decline in markets expected regardless of the Brexit outcome.
The US economy is extremely healthy going into 2019. Unemployment is at a 50-year low, consumer confidence remains high and GDP growth remains robust, driven by strong consumer spending. The US treasury yield reached 3.2% in October, driven by real rates moving higher while inflation is falling, all indicating that the outlook for the US should be positive. Despite its current health, with a series of rate rises expected in early 2019, excessive tightening poses a risk to the US economy. Over the year, tighter policy and greater political uncertainty as a result of geopolitical tensions and domestic political issues indicate potential for market decline in 2019.
In Europe, data continues to disappoint amidst growing trade tensions, rising political uncertainty and low consumer confidence. PMI is below expectations and falling, and trade tensions have taken a toll on business optimism. When the data stops disappointing, the economic fundamentals suggest that there is further room for returns in this area in the near term, however over 2019, high levels of volatility and continued low growth are expected to result in market decline.
Overall, while there are opportunities for returns to be had in 2018, 2019 is likely to be characterised by tighter monetary policy, continued political uncertainty and high volatility. For this reason, exposure should be chosen carefully both in terms of geographical area and asset class. As market volatility increases going into 2019, active investment strategies and diversification will be key to producing returns and preserving capital, with passive strategies leaving clients open to a large amount of downside risk. As the old expression suggests, investors must ‘Keep calm and carry on’ to successfully navigate markets through 2019.
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