2018 has been an investment washout: will 2019 be any brighter?

Despite a longer and hotter summer than usual, 2018 has turned out to be a bit of a wash-out for investors. Of the 37 fund sectors in existence, only a handful have made any profits: technology & telecommunications (7.5%*), North American and North American Smaller Companies (5.6%* and 3.7*), property (up to 4.3%* depending on whether it’s direct or ‘other’), UK gilts (1.24%* for those linked to inflation and 0.28%* for those not linked) and cash (0.4%*). Every other sector is in negative territory.

The year started off so well. Geopolitical tensions had eased, we finally had some synchronised global growth and company earnings growth was strong. But global stock markets – along with other assets – have fallen quite significantly.

Four choices investor may need to make

We think it could be another difficult year for investors. The consensus is that a recession is highly unlikely in 2019, but the stock market does tend to act ahead of the economy. So it could be another volatile 12 months. Investors may be well-served by taking a look at the make-up of their portfolios and perhaps rebalancing any biases – intentional or otherwise – that may have crept in.

We take a look at four choices investors may need to make when positioning their portfolios for the coming year.

1. Equities or bonds?

While global stock markets have fallen from their highs, we still prefer the asset class to bonds. The US economy is still growing, which should be a positive for stocks, and we fully expect the US central bank to continue raising interest rates, which should be a negative for fixed income. If government bond yields rise further, it may be time to re-enter the asset class. But for now we prefer bond funds that are positioned to be less sensitive to interest rate movements.

Read more about AXA Sterling Credit Short Duration fund

2. Developed or emerging?

Rising interest rates should support the US dollar and keep it strong, which is bad news for emerging markets. Couple this with the impact they have yet to feel from the trade war tariffs and emerging economies could start to slow and see inflation pick up. Long term investors may like to take advantage of cheaper emerging market shares, but they may have to be patient for the rewards – 2019 might not be the year we see a rally. We prefer developed markets for now– in particular Japan and Europe where valuations are more attractive than the US on a relative basis.

Read more about Janus Henderson European Selected Opportunities and AXA Framlington Japan funds

3. Growth or Value?

With the exception of one or two very short periods, growth stocks have outperformed value for the past decade. Quantitative easing from the world’s central banks has created a somewhat artificial cycle. The result has been a longer period of rising stocks markets, but a more muted recovery than history would have suggested. This could well continue but, as quantitative tightening gathers pace and growth become less attractive, value stocks could make a come back. We think it prudent to be ‘style-neutral’ at this point – which could mean investors need to top up on value holdings if they are currently underweight.

Read more about Investec Global Special Situations fund

4. Large or small?

The biggest risk to the UK stock market at the moment is Brexit. If we get a ‘hard’ exit, small and medium-sized companies are likely to be hit harder than larger ones, as they are more domestically-focused. In the same vein, if global stock market volatility is to continue, larger companies tend to outperform in the shorter term. So at this late stage of the cycle, we prefer a higher weighting to large caps than we would do normally.

Read more about Fidelity Special Values trust

*Source: FE Analytics, 1 January 2018 to 10 December 2018, total returns in sterling. The sectors referred to are: IA Technology and telecommunications, IA, North America, IA North American Smaller Companies, IA UK Direct Property, IA Property Other, IA Money Market and IA Short Term Money market.