How to invest in 2019

‘What should I do with my portfolio for 2019?’ A decade or so after the global economic recovery began and following a more difficult year in the markets in 2018, it’s the most asked question.

By David Bailin

We believe the answer lies in reconciling two very different and powerful developments in the world.

The first is a return to pre-crisis normalcy in the global monetary system and markets. The second is the uncomfortable new normal in politics and international relations.

The return to normalcy in the global monetary system and markets concerns central banks’ bringing to an end their emergency measures to prevent the Global Financial Crisis of 2008 becoming a new Great Depression.

Central banks are gradually retreating from zero borrowing costs and their multi-trillion dollar asset purchases that had fueled markets. The withdrawal of these measures has seen market volatility rise, unsettling many investors who had become accustomed to the placid conditions of recent years.

Against this backdrop, 2018 was different to 2017 for investors. Global equities were down 4.3 per cent for the year as of December 1, compared to their 20 per cent gain the prior year. Emerging markets fell 14.1%, after their 34.4% rally in 2017. This pullback may have been partly a reaction to the strong gains that preceded it.

However, the withdrawal of monetary stimulus - as well as rate rises in the US - clearly left markets more vulnerable to the political shock of the escalating international trade war in particular. Asset prices thus suffered greater volatility than they had done for several years. The return to normalcy has not felt as good as investors may have expected.

In politics and geopolitics, by contrast, normalcy is in retreat. The post-Cold War international order – characterized by multilateral cooperation, freer movement of people, and more tolerant societies – is under pressure. Voters in countries including the US, the UK, The Philippines, Italy, Hungary, and Brazil have given their backing over recent years to political movements fronted by populist strongmen whose agendas are characterized by foreign policy isolationism, economic nationalism, closed borders, and perhaps also authoritarian law-and-order policies.

We do not see this new and uncomfortable political normalcy reversing any time soon. Certain leaders will continue to seek to bolster their powers, sweeping aside many checks and balances. China’s President Xi Jinping has already abolished limits on his time in office, while Brazil’s new president Jair Bolsonaro has praised the country’s former dictatorship.

Any weakening of global economic growth could further strengthen nationalist sentiment, the appetite for trade tariffs, and calls to vest even greater power in the hands of these politicians.

Faced with the return of market normalcy on the one hand and its retreat politically, how should you invest in 2019?

The approach we take for 2019 has two main elements. First, we create guideposts to determine how we may anticipate events, and assess their potential impact on your portfolio. Second, we advise building stronger portfolios for turbulent times by investing in more resilient assets and by employing strategies that reshape investment outcomes.

By watching the guideposts, you can then make portfolio adjustments going forward, seeking additional diversification, and tactically exploiting valuation opportunities as they arise.

Among our key guideposts for 2019 is the state of global trade. The escalation of trade tensions in 2018 took many investors by surprise, triggering volatility in markets in China and other emerging economies in particular.

As well as trade, we believe investors should focus upon the likely impact of the US Federal Reserve’s gradual, but extended tightening cycle.

Besides watching our guideposts, we also emphasise taking positive action now. The return of monetary and market normalcy – and the new normalcy in politics – make portfolio quality even more important.

We therefore urge you to allocate to countries and companies that are most likely to withstand the challenges now facing the world. Here are seven steps that we recommend you consider to strengthen portfolios as we enter 2019:

• Understand your risk profile. If you have a five-to-10-year investment horizon, you probably don’t need to change it. But if your circumstances or risk tolerance has changed, your portfolio should be updated accordingly.
• Don’t try and time the financial markets – it’s a fool’s game.
• Preserve your portfolio’s value by diversifying globally and adding higher quality assets. Global investors will be able to ride out turbulence better and may potentially recover faster.
• Review your portfolio as events unfold. By doing so quarterly or at least semi-annually, your portfolio should add assets when markets are cheaper and tilt towards markets likely to recover faster. As markets rally, such portfolios are likely to garner better risk-adjusted returns.
• Ensure a robust risk management regime to cope with volatile conditions. You can help preserve the safety and return potential of your portfolio this way.
• If you have capacity consider a small allocation within your portfolio to allow you to invest during unusual events and short-term market dislocations.
• Seek advice more frequently, and let us help you understand the data, and interpret the guideposts.

David Bailin is Citi’s Chief Investment Officer.