From pessimism to optimism

Posted by Liz Rees in Latest insights category on 02 Jan 20

Many of us will have made resolutions to help start the New Year on a positive footing. As families get together to plan their next holiday or perhaps a new home (residential property websites get a surge in views over the Christmas period) it may also be a good time to review your investment portfolio.

Markets began 2019 shrouded in pessimism as the global economy slowed on the back of escalating trade wars and Brexit uncertainty. Indeed, it may prove to be the worst year for growth since the Financial Crisis, with the UK being particularly disappointing.

Whilst consumer spending generally held up, buoyed by healthy employment and real wage rises, business confidence and manufacturing output came under pressure. This led to capital spending plans being put on hold.

However, roll on 12 months and some of the clouds appear to have lifted. More importantly, investor confidence returned and most asset classes, from government bonds to bitcoin, delivered strong returns by the end of 2019.

Over the year to 31st December, the MSCI AC World index advanced 26%, led by the US. The UK market, which had lagged for much of the period, enjoyed a ‘Boris bounce’ following a resounding election victory for the Conservatives which gives them a firm mandate to deliver Brexit.

Is this a relief rally or the start of a more sustained recovery?

Stock markets reflect future expectations as well as the current situation and sometimes it can be better to travel than arrive. Certainly, a pull-back is possible until we get clear evidence of an economic upturn.

In any event, growth is expected to remain modest albeit on an improving trend as benefits of interest rate cuts in the US and Europe feed through. We may be late in the economic cycle but there does not seem to be the euphoria frequently associated with a bubble.

As trade tensions fade, all eyes are on whether the US domestic economy recovers from a mid-cycle slowdown or heads towards recession. However, recession seems unlikely in an election year. In the past, the market has tended to perform well whichever party wins, though there may be bumps along the way.

Activity outside the US should pick-up gradually in 2020. If any improvement outpaces the US, we may see a weaker US dollar. This would be supportive for Emerging Markets following a decade of underperformance.

In Asia, China is focusing on sustainable rather than absolute levels of growth whilst India is undertaking labour reforms to establish itself as a manufacturing centre. The region has been held back by trade wars but I still believe this could be the decade, and indeed the century, for Asia. A fund well placed to capture opportunities in the region is Morningstar gold-rated First State Asia Focus.

Turning to the UK, if Boris Johnson delivers on Brexit and invests heavily in the Northern constituencies that backed him this could be good news for domestically-focused companies, especially small and mid-caps. Morningstar silver-rated Franklin UK Mid-Cap is managed by renowned stock-picker Paul Spencer.

Europe faces ongoing political turmoil and is a value based economy with large exposure to financials and industrials. Whilst there is recovery potential, care is needed to avoid companies facing structural challenges, for example automotive. That said, it is home to plenty of attractive growth companies with world-leading brands.

Keeping on track

Of course, there will always be unforeseeable events which is why it makes sense to have a good spread of holdings by country, size and style. I’ve experienced the ’87 crash, the dotcom bubble in 2000, the financial crisis in 2008, as well as regional crises in Asia and Europe and a number of recessions. Through all this, diversification has helped my portfolio survive intact.

Why not use our :review service to find out if you are on course to achieve your goals. We have recently added a new tool to give you an idea of the risk score of your portfolio. This may help you decide if you are taking too much or too little risk relative to your personal circumstances.

A spell of strong performance should not be an excuse to do nothing; the best performers of one year can be the laggards the next and vice versa. Conversely, if investing for the long run, don’t rush to bank all your profits either, as ultimately it’s time in the market that counts.

A quick review of my own portfolio reminded me that trying to time the market is a precarious strategy as can be holding too much cash. It’s all very well having a cushion to buy on the dips but you do need to be fleet of foot. A regular savings plan to drip money into the market will be the way forward for me!

A major theme of 2019 was Environmental, Social and Governance (ESG) factors. These are increasingly being incorporated into mainstream investing. Recognition that global warning poses serious risks to some companies, suggests these concerns cannot be ignored. So, to meet my personal views, I’m adding funds with positive biases to a sustainable world.

Once your own portfolio is in order, it may be a good time to start a conversation about saving and investing with other family members; if they haven’t got started yet point out some of the tax efficient wrappers that are available such as Junior ISAs. A good way to engage older children is to talk about the brands that feature in their lives and look at which funds invest in them.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.