Business hates uncertainty, we are constantly told. Well, investors aren’t all that keen on it either and since we seem to be enjoying a super-abundance of uncertainty at the moment, this is a peculiarly uncomfortable time to have your capital at risk in the markets. Between Brexit, the potential disintegration of the EU, weak economic growth and rising US interest rates there are few encouraging signs in any direction.
For those scratching their heads over where to put their money as 2019 begins, we highlight three trends to watch for in the year ahead and offer three thoughts on possible opportunities for these uncertain times.
Trends:
Inflation and Currency Risk
Higher UK inflation is likely for two reasons. If we get a poor or disorderly exit from the EU, the pound will weaken. This will push up the prices we pay for imported goods, notably oil. Even if Brexit is orderly, the government’s new immigration policies are likely to cause labour shortages, which will feed through to higher wage demands. Both a diving pound and higher wage inflation (in an economy that already has very low unemployment) point inexorably towards higher interest rates. Highly indebted households, companies and the property market, which have grown addicted to low rates, could be in for a shock.
Financial Education and Free Advice
Many people struggle to understand everyday financial products and therefore make poor decisions, but help may be at hand. In January, the new Single Financial Guidance Body—formed by combining the Money Advice Service, The Pensions Advisory Service and Pension Wise—officially starts work. The opportunity to create a universally available, free financial guidance service that spans everything from teaching the basics in primary schools to preparing people for retirement is too big and important for the UK to mess up. In 2019 we might just see real progress on financial capability.
Year Three of the US presidential cycle
Historically, US markets have usually performed strongly during the third year of the president’s four-year term in office. According to MarketWatch, over the past 90 years the Dow Jones Industrial Average has done well almost every time, gaining an average of more than 21 per cent. This may be because presidents time disruptive economic reforms such that by the second half of their term—when re-election may be looming—they’ve got the pain out of the way and are starting to enjoy the gain. Will we see similar restraint in economic policy once again in 2019? It will be fascinating to see whether this is another accepted norm that President Trump shatters, along with globalisation, multi-lateralism and minimum levels of self-control, honesty and tact.
Opportunities:
Cash
It sounds negative, but the best option at times like these may well be cash. Sure, it loses you money in real terms because interest rates are so low, but it gives you huge flexibility to take opportunities as they arise and in uncertain times there’s nothing more psychologically comforting than ready cash. Critics will argue inflation makes this a losing strategy, but I prefer to regard any hit from inflation as I would an insurance premium: the price I must pay for the comfort of instant liquidity and the freedom to move quickly when I want to.
Short-dated US Treasury bonds
Short-term bonds should be about the second-dullest investment there is, after cash. But sometimes dull is good. US Treasuries with durations up to about one year have performed very well through 2018 as US interest rates have steadily risen, and provided the US economy continues to power ahead and the Fed continues to nudge rates higher, expect that to continue. For UK investors worried about sterling, having a bit of money in solid, dollar assets producing a reasonable yield might well turn out to be a useful hedge that helps to preserve your wealth. They can be accessed cheaply via various exchange traded funds. This market will need watching with at least half an eye, however—if the US economy falters, the risk/reward trade-off here might start to look less attractive.
Sustainable Investment Funds
ESG funds, which focus on companies that score well for their environmental, social and governance performance, are already an investment trend. But this trend is still in its infancy. There’s a stream of regulation in the works that is going to push institutions further towards sustainable investment and I suspect, therefore, that companies which are highly-rated on ESG measures are going to become more sought-after. Once any panics pass, there are worse places for your money: research shows these companies often make sound investments because good ESG scores equate closely to higher “quality,” one of the key “factors” of investment returns alongside value and momentum. Again, there are ETFs that allow you to buy ESG-tilted portfolios, as well as actively managed funds.
