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What can investors expect in 2019?

28th January, 2019

2018 proved to be a challenging year for investors. The absolute level of returns was low across nearly all asset classes. In addition, from the end of September there was increased volatility in global equities as the US market finally joined the rest of the world in a sell-off from recent highs. So, as we take stock at the end of 2018 we must ask what can investors expect over the short to medium term?

We think positive returns can be achieved but we expect them to be lower than recent years and lower than the long-term expectations for our diversified multi asset strategies. One of the reasons for this is that the outlook for the defensive portion of portfolios, cash and bonds remains bound by the low prevailing interest rates. So we expect a zero return from this element of the portfolio over the next couple of years. These assets play an important role in diversifying portfolios but will not offer much upside in the short term.

For a moderate risk portfolio with approximately one third of the portfolio in defensive assets, this puts a headwind against our potential returns. The other factor to consider is the stage of the cycle we are in. As Alan Werlau outlined in the Outlook, we still expect positive returns from equities in the near term. However, historically the returns from equities late in the cycle are lower so it is prudent to expect a lower return in the near term.

 

What is an investor to do?

When we discuss our current outlook with clients there are three broad questions that are asked:

 

1. Should I sell?

The vast majority of investors’ time horizon extends beyond the next few years and realistically into decades. Therefore, during our investment lives we will face multiple points when rolling returns are above or below the long-term trend. While it is possible to sell in advance of a period of potential lower returns, our experience is that this introduces significant behavioural risk and the likelihood of reinvesting after the market has had a correction is relatively low. The idea of timing the market can be a very alluring strategy, but in practice adopting a market timing approach introduces a material risk of a worse overall outcome.

 

2. Should I postpone additional planned investment?

While lower returns are our central forecast, they are not guaranteed, so investors should not deviate from the agreed strategy of deploying capital for the long term. Funds left in cash over any medium-term time horizon will lose purchasing power as inflation erodes value. In addition, our portfolios are dynamic as opposed to static and we continue to monitor the investment landscape and ensure that client portfolios are allocated in an appropriate manner. We adjust asset allocation to defensive assets and tilt towards specific styles, regions and managers. While passive allocation to markets has served investors well over the last number of years, we believe an increase in differing company performance will present strong opportunities for active managers to add to portfolio returns in the coming year.

 

3. Should I change my risk profile?

We do not believe that increasing your exposure to risky assets in the short term in pursuit of additional returns offers an attractive risk return decision.  Our advice to investors is that significant changes in strategy should be dictated by circumstances in your own financial life as opposed to short-term market events.

However, it is ultimately a decision for investors to consider for themselves and how it aligns with their investment plan. One way of assessing this decision is using the regret minimisation approach. Will you regret it more if markets move higher in the near term and you capture less of the returns or would you feel worse if you had more equity exposure and the markets sell off?

 

Figure 1: % Price return, local currency

Source: Bloomberg. 31st of December or last pricing date of the year.

 

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Portfolio Construction What can investors expect in 2019?

2018 proved to be a challenging year for investors. The absolute level of returns was low across nearly all asset classes. In addition, from the end of September there was increased volatility in global equities as the US market finally joined the rest of the world in a sell-off from recent highs. So, as we take stock at the end of 2018 we must ask what can investors expect over the short to medium term?

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