After steep falls in global sharemarkets in the last quarter of 2018, the US and Australian markets have recouped most of their losses during the first 2 months of 2019.
However, although we appear to be in the late stages of the economic cycle, the outlook is unclear. In fact, we could remain here for 1-2 years coupled with high volatility, making it impossible to “time the market”.
Morningstar Investment Management (Global Insights February 2019) believe that it is most important for you to base decisions upon an assessment of the “valuation” of each specific investment rather than the general economic outlook only. Having said that, they see the main dangers to your medium term investment gains as:
1)The Brexit deadline of 29th March and its impact upon the European economy.
2)The US/China trade negotiations as the demand for Australia’s goods from our main trading partner starts to slow.
3)The direction of Us interest rates which would flow on to borrowers and the housing market in Australia.
Further, they believe that global share and bond markets are generally overvalued at the moment and consequently have a higher risk of delivering lower returns or losses. They see the US sharemarket as the least attractive and Australian shares as generally unattractive to buy. By contrast, they see some value in general emerging country share and some bond markets, the UK market following Brexit uncertainty and the Japanese sharemarket as companies shift their attention to shareholder returns.
Consequently, given their objective is to reduce portfolio risk while generating reasonable long term returns, Morningstar hold higher than usual amounts of cash in their portfolios while they wait for better investment opportunities to arise.
So, what are we doing with our clients? Well, we see the critical steps as:
1)A discussion about your personal situation, specific objectives and likely reaction if investment values decline should take place before amending their strategy or investment portfolio.
2)Having a secure income or cash reserves to cover all loans and living expenses over the next 2-3 years would be ideal.
3)Avoiding excessive debt, especially if a bank loan foreclosure is possible.
4)Diversify across growth and defensive assets, avoid expensively priced assets and include some “alternative” investments in the portfolio that are less vulnerable to traditional market corrections.
High quality “active” funds or direct portfolios could be preferable to having only “exchange traded funds” (ETFs) as the active manager can avoid overvalued assets that are most at risk of loss. By contrast, passive investments such as ETFs are often used to build a well diversified, “core” part of the portfolio but are likely to hold plenty of overvalued asset will fall further if markets correct.
Importantly, we can assist you to make sensible decisions, taking into account multiple factors, that will deliver a better long term outcome for you.