19 Dec 2018
2018 in review - A year to forget...or one to remember
- Chris Lioutas - PSK Chief Investment Officer
Behavioural finance shows us that human bias puts more weight or emphasis on near term events rather than events further in the past. Hence, 2018 would be more a year to forget than remember. However, remembering years like 2018 is equally important in terms of providing a reminder that investing in anything outside of at-call cash deposits at the bank involves some sort of risk and that that risk varies through time. Risk appetite and risk tolerance are two very different things.
Highlights for the year included:
- Synchronised global economic growth
- Roaring equity markets led mostly by tech stocks in the US
- Oil price surge on production cuts, sanctions, and rising aggregate demand
- Falling unemployment across all regions
- Rising wages globally, mostly led by the US
- Inflation largely in check, somewhat surprisingly given rising economic growth and tighter labour markets
- Corporate profit margins remaining high
- Strong corporate earnings growth on rising demand and significant tax cuts in the US
- Corporate balance sheets largely remaining in good shape
- Rising household wealth in light of property and equity markets rising globally
Lowlights of for the year included:
- Trade wars
- US central bank possibly getting ahead of themselves with regard to tightening of policy
- Tight US labour markets leading to labour shortages thus constraining growth
- Potential US recession potentially nearer than expected
- Brexit
- Italian elections and subsequent budget
- Chinese growth slowdown
- Chinese deleveraging without previous levels of stimulus
- Trouble in emerging markets on US dollar strength and political risks (Turkey, Argentina, South Africa, Brazil)
- US / North Korea
- Australian residential housing market under pressure from change in bank lending behaviour
- Sharp falls equity markets in the last few months on the back of rising investor concerns and higher US interest rates
For the sake of brevity, these lists are obviously not exhaustive.
The key takeout is that something around the world is always happening that may or may not affect investment markets. Risks are a constant, but investor perception of risks varies widely and is near impossible to forecast with any degree of certainty. The risks for 2019 certainly seem elevated, however, these risks have largely been known for some time. What has changed are the degrees of probability around them.
What we can do is focus on the fundamentals and assess the risk of changes to these fundamentals over the medium to longer term. As it stands right now, we don’t think the risks likely to present themselves in 2019 warrant the breadth and depth of largely panic selling that we’ve seen in the last few months. We expect a reasonable year from investment markets in 2019, better than the last few months, but not as good as the last few years.
For some, this will represent an opportunity; for others it will represent a time to sit back and reflect; whilst for others it will cause some angst and concern. For all, it represents an opportunity to ensure the following applies or is present:
- Quality – high quality investments, held over the longer term, create wealth
- Diversification – both across and within asset classes and individual assets. Yes, the most recent experience has shown us that all asset classes can go down at once, but it’s also reinforced that there are varying degrees of down and diversification still works
- Review – regularly reviewing your portfolio doesn’t necessarily involve the need for action. But reviews do highlight which investments are doing better than others, and trimming winners and topping up laggards, has been proven to work over the long term
- Opportunity – it’s quite often difficult to take advantage of opportunities as they present themselves as it usually comes after a sell-off or involves going against the herd. The greatest long term wealth is created by taking advantage of such opportunities
The Australian Property Market - December 2018
The Aussie Dollar - December 2018
The Markets Around the World - December 2018
