What a difference a month makes!
After a terrible end to 2018, Share Markets around the world have been staging a strong rally in 2019. Catalysts include the US Federal Reserve giving their direction on interest rates, saying they are close to neutral, meaning the interest rate increases that were expected and that the market was worried about, will not be as aggressive if indeed they need to raise at all. This is good for markets.
Trade talks between China and the United States have struck a more conciliatory tone and markets are holding hope that a resolution can be achieved. Furthermore, fourth quarter profit reporting in the US is underway and while considerably lower than the previous quarter (this was expected), many companies are surprising on the high side, supporting markets further. It all paints the picture of more stability.
What will mark the end of this decade long super cycle of growth is unknown, however there are several prominent economists who believe 2019 will end positively for share markets.
In terms of Australian shares, Craig James from Comsec thinks they will advance 10 – 12% and Shane Oliver predicts from AMP around 8%, with his predictions for Global Shares to rise around 11% in Aussie dollar terms.
Residential property markets in Australia were generally quite poor throughout 2018 and are widely predicted to have another tough year in 2019. Tighter bank lending policy due to the impact of the Banking Royal Commission is having the biggest impact, as credit is becoming tighter and harder to get. The findings of the Royal commission are due to be handed down to the Government in the near future and there is an expectation that lending will continue to remain tight.
In addition to this, if the Labour government are elected, their proposed Negative gearing and Capital gains tax policy changes are expected to further stack the cards against the short term performance of residential real estate. Shane Oliver expects the market to dip by 20% from top to bottom, leaving a lot of potential downside movement still to be felt and he is not alone in this assessment. Amongst others T-Rowe price, are another global fund manager that expect 10 – 20% downward movement as their base case “and very little policy tools to fight it”.
But what will actually happen in 2019?
There are so many if’s, buts and maybes that will drive markets into 2019 that there is no way of actually knowing. But whatever the actual outcome is, it is generally expected that it will be marked with volatility. With this likelihood in mind it makes sense to understand what volatility means for you and to be volatility ready.
I read an interesting article recently by one of the world’s biggest investment managers ‘Fidelity’ and they outline how to ‘own’ volatility and with it, accept it as part of your growth investment strategy.
A note on volatility
”Above all else, financial markets dislike uncertainty. Yet markets are also prone to over-react to events that cloud the short-term outlook. As an investor, it is important to take a step back at these times and keep an open mindset. When we’re prepared at the outset for episodes of volatility on the investing journey, we’re less likely to be surprised when they happen, and more likely to react rationally. By having an open mindset and a longer-term investment perspective that accepts short-term volatility, investors can begin to take a more dispassionate view. Not only does this help with the job of staying focused on long-term investment goals, it also allows investors to begin to exploit lower prices rather than lock in losses by emotionally selling at lower prices.“
Alva Devoy. Managing Director – Fidelity Australia
For all of our clients who invest with us, we actively discuss volatility because it is actually a normal part of investing.
Your volatility comfort should determine what amount of risk you take with your investing and we work with clients to understand their ‘Risk Profile’ to help get the right balance of risk versus reward.
But there are other strategies we help implement that also smooth volatility. Things like:
Time – Be clear on a suitable investment time frame to ride out the bumps
Diversification – it naturally smooths out volatility
Ongoing investment – not trying to time the market as much and smoothing out returns as a result
Structure investment strategy mindful of goals – So you have sufficient access to money that you need to meet your short, medium and long term goals
Proactive investment management – adjusting the portfolio and responding to change
On the last point, we have recently made changes to our client’s portfolios, that position them better for the current market, being a market that is sending both positive and cautioning signals at the one time.
Investment into fund managers that have flexibility to withdraw from the market to cash when they deem the downside risk too high, but equally to invest fully into growth is one example of this.
Having said this and as a last important point about volatility, it is worth reflecting again on the steep recovery we are enjoying in share markets right now as it is the exact reason why it is important not to be too reactive to markets.
Written by James McFall of Yield Financial Planning