What’s ahead for the investment market?

While investment market returns have been modest in 2018, held back by a combination of slightly softer economic growth, trade concerns and geopolitical scares, stock markets can move higher over the next 12 months, according to Tom McCabe, global investment strategist at Bank of Ireland Investment Markets, but he says continued global economic growth is important if this scenario is to play out.

“At present, the global economy is performing reasonably well. The US is leading the economic flotilla thanks mainly to 2017’s tax cuts which will push growth rates higher this year. A damaging US-Sino trade war is a risk for the global economy but we are hopeful this can be avoided. In the meantime, the weaker yuan should relieve some of the trade pressure on China while a stimulus package is another potential support, should tensions escalate further.

“More recently, fears about an emerging market crisis have risen as Turkey and Argentina have hit the headlines. Emerging-market equities have underperformed as a result and we don’t believe this underperformance will reverse in the short term. However, we don’t expect the economic turbulence in Turkey and Argentina to trigger an emerging-markets crisis as in the late 1990s as generally speaking these economies are structurally sounder from an economic perspective compared to previous years,” McCabe says.

John Crowe, chief executive of Kestrel Capital, says from an economic standpoint, the biggest areas of focus, as he sees it, are interest rates, China and trade.

“The low interest-rate environment since the financial crisis has made central bankers one of the key actors in the financial system. As interest rates start to normalise, that can have significant impact on asset prices, savers and borrowers. China has been the engine of global growth. As the Chinese economy hands the baton over from being a manufacturing hub to a consumer hub, that will have a profound impact on the global economy and politics over the coming decade,” he says.

Globalisation under threat

For the first time in decades, globalisation as we know it is under threat, he adds.

“A trade war is unambiguously negative for the global economy and risk assets. When the US imposed tariffs on 20,000 imported goods in 1930, their trading partners responded and US exports fell 61 per cent in the next four years. Nobody wants to see a return to a more protectionist global economy,” Crowe says.

So with so much uncertainty, what can investors to do protect themselves?

Crowe says 24-hour news streams and feeds make investors nervous. “Human beings have an action bias where we constantly feel that we need to do something or react. Such an approach is an enemy to your plan. As investors, we need to drown out the noise and focus on what has a meaningful impact on our investments, then analyse if such news warrants action to be taken.

“When purchasing any asset, firstly you need to understand the asset. From there, a simple strategy of buying quality, not overpaying for the asset and then holding onto that asset for the long term tends to trump most other strategies that we have analysed. Secondly, a diversified portfolio approach that has a spread across assets, regions, sectors and currencies has proven to be an excellent way to dampen the impact of market pull-backs,” he adds.

The old adage of risk versus return is still very much the case.

“Global equities have delivered the best annual returns but they have also had the largest pull-back of any other asset. From 1928-2018, US equities delivered annual returns of 9.6 per cent per annum or 6.4 per cent after inflation. However, since 1928, equity markets typically have 5 per cent pull-backs three times per year and 10 per cent pull-backs once a year. Whilst over shorter time horizons, other asset classes such as cash have had lower downside risk, over the long term, cash has only generated returns of 0.39 per cent after inflation. A diversified portfolio that has a blend of different asset classes can help you achieve your investment goals whilst keeping a watchful eye on risk,” Crowe says.

Your time horizon also has a crucial role in determining your probability of success.

“Since 1971, you would have had a 38 per cent chance of achieving a negative return from owning stocks over a one-month period, that reduces to 20 per cent over one year, 10 per cent over a five-year time span and 0 per cent over 20 years. When it comes to the stock market, time really is money,” he adds.

Outlook positive

Overall, the global economic outlook remains positive and recession risks are low, McCabe says.

“This still suggests returns from risk assets like equities and commercial property should outperform cash and government bonds over the next year. However, the gains could be more modest and more hard-won than earlier in this bull market.

“Investors should also expect geopolitics to continue to be a factor over the next few months. Brexit and Italian politics have featured heavily so far in 2018 and as we approach the end of the year the US mid-term elections are coming sharply into view. Here, the key issue is whether the Republicans can retain their Congressional majorities, thereby helping President Trump press on with his legislative agenda.

“Over time, geopolitics has rarely heralded the end of a bull market in stocks, which should provide some comfort. However, it can create a lot of short-term volatility for investors. Unfortunately, there is no ‘silver bullet’ for dealing with this. However, by having a well-diversified portfolio and a long-term investment horizon, we believe investors can better weather such episodes of volatility.”