Economic and Markets Outlook 2019

sun-over-troubled-waters-2019The Economic and Markets Outlook 2019 offered by Continuum Financial Planners Pty Ltd is prepared to provide a backdrop to the investment recommendations we will make, particularly in the early part of the calendar year, from information published by a range of investment analysts, economists and researchers on whom we rely.

It is published for transparency, so that investor clients can have an understanding of our philosophy and can compare that to other information they might allow to influence their view on market direction in particular.

For 2019, we have drawn on material published by the Reserve Bank of Australia, Franklin Templeton Investments, Russell Investments, Vanguard, and Zurich Insurance; and information gleaned from regular viewing of the Bloomberg Markets segment over the past month or so. The commentary around the economic and markets outlook 2019 is generally flavoured with talk of us now experiencing ‘late-cycle’ risks to investing. (The Bull Market that has followed the GFC will have run for more than ten years by mid-2019: the longest period of economic growth in the US on record.)

The Economic Outlook

The many commentators we have read suggest that 2019 will be a year of positive growth globally, albeit lower than for 2018 – and slightly less for 2019 than had originally been projected by the International Monetary Fund – ‘the IMF’. (This is not an unusual situation though, as the original outlook was published many months earlier and is usually refined as the start of the outlook period approaches.)

Regionally it appears that North America may be due a slow down in growth as the tax stimulus provided by the Trump Administration runs out of steam – and the trade war tariffs and trade agreement bickering take time to resolve: slow though it might be, the US is expected to see around 2% GDP growth for 2019.

China is expected to grow at slightly less than the original forecast of 6.5%, but the consensus view seems to be that 6% will be achieved. Japan and the European Union are expected to see between 6% and 8% growth, whilst other Asian economies are also expected to produce above (recent) growth as those major economies – and currency arbitrage effects – benefit them.

The Emerging Market economies are expected to have a good year in 2019, due in some part, to the fact that they have had such a poor run for the past eighteen months or so.

Central bank interest rates are expected to start to climb in almost all economies, either during 2019 or very soon thereafter. They will also need to follow the US example and start the reduction of their Balance Sheets: allowing Bonds to mature and not replacing them. This will have the effect of drawing liquidity from the economy, forcing market interest rates higher, tightening credit conditions and possibly leading some economies into recession, as inflation starts to pick up (as higher prices are forced by such conditions). The consensus view is that recession in the US is unlikely to happen during 2019, but increasingly likely some time in the following year.

The Markets Outlook

Markets are made in a number of asset classes, most of which can be categorised under the three major classes – Cash, Equities and Property; although a further asset class is also to be considered – and that is, Alternatives.

Whilst the Cash component of any portfolio may have a number of elements to it (liquidity for known future commitments, reserve for strategic investment into a particular asset, or as a risk modifier, to name a few), there is an increasing voice to suggest that, in times of market volatility such as has been experienced over the past several months – particularly since mid-October 2018, Cash is an increasingly viable investment option in its own right. To any domestic investor, local currency is capital secure, and readily negotiable, stabilising the portfolio in times when share prices – and Bond interest-rates – are volatile.

Equities for 2019 are likely to see considerable volatility: on a local market index basis (such as say, the ASX in Australia, or the S&P 500 in the US), the outlook is clouded by the levels of debt held by companies, borrowed during the past few years when money has been incredibly ‘cheap’ for them. With interest rates anticipated to rise at some stage during the 2019 year, when overall turnover and profit margins are expected to if not decline, at least plateau in many industries, the earnings of companies are expected to decline, albeit modestly in many cases, during the year – and that is expected to cause volatility in sharemarkets. The outlook though, for the different world markets, varies between mid-single digit returns for the US market, to high single-digit returns for the European markets – and a range of outcomes around those numbers, forecast for the other major equity markets.

Property investment is interest-rate sensitive and in the environment described above, most forecasters are suggesting that only very isolated, specialised property markets are likely to grow during 2019. (Generally speaking, property in investment terms, is commercial or industrial property held by Real Estate Investment Trusts – or ‘REITs’ – and should not be used as a proxy for what might happen in residential markets in different economies.)

Investor Outlook

The anticipated volatility to be experienced during 2019 will best be dealt with by clients who are invested according to a timeframe-effective strategic investment plan. Whilst the outcome for calendar year 2018 has been disappointing, it had been close to target performance up until mid-October, with reasonable anticipation that it would finish as a year where the (Balanced) investor would see growth in their portfolio (including both income and market value change) of around CPI, plus 5% until the events of the past couple of months (thanks Mr Trump!).

There are numerous factors that affect markets, none the least of which is investor sentiment. And investor sentiment is often driven by market performance. If the market performs well, people feel good: they are more willing to spend, more often on more discretionary goods – and they often translate that ‘feeling’ into investment decisions.

Other factors that are often cited as the cause for any particular move in market valuations include the Brexit situation, the tariffs/ trade ‘war’ talk, the US-China relationship and a range of geopolitical events. Many of these are unpredictable as to timing, or consequence.

Investors who have a sufficiently long investment time horizon should be looking to review their investment goals and, where their risk profile has been adequately and appropriately determined, use the volatility events to rebalance their strategically-designed portfolio – sell down the high performers, buy into the under-performers – and remain patient. Whilst this is an useful strategy for investors at any time, it is particularly useful during the volatile times that are expected to continue for some months into 2019.

For investors who have appointed managers to watch over their portfolios, as is the case with the majority of this firm’s clients, the selection of managers who exercise their investment philosophy consistently and in keeping with the strategic philosophy by which they claim to operate, should ensure that all of the risks are appropriately considered – and managed.

In times of high volatility as are anticipated for 2019, our advisers recommend to clients in suitable circumstances, that dollar-cost-averaging be applied to their portfolio establishment. Within the asset allocation, the equities portion of the portfolio will most likely be populated with companies that are less geared than the average for their sector; while the Bond managers will have a reasonably short duration in their portfolio.

Your economic and markets outlook 2019

The team at Continuum Financial Planners Pty Ltd is ready to work with clients, existing and new, to review investment goals and objectives, to confirm time horizons and risk aversion position; and to engage in ongoing review services to ensure that your investing remains relevant to your situation and achieves outcomes in your best interests.

We look forward to your contact – and to being of service to you1. To arrange a meeting with one of our experienced advisers, please phone our office on 07-34213456, or complete the Contact Us form on our website – and be assured of prompt attention.

1Australian resident investors only able to be advised and serviced.

(This article was originally posted in an email dated January 2019, to clients who subscribe for an ongoing service arrangement with their ContinuumFP adviser.)