While financial markets crave certainty, 2019 is unlikely to offer them much respite from the confused state of affairs that have impacted sentiment in the past few years, according to Psigma Investment Management’s Thomas Becket. 
Offering his outlook for the coming year, Becket – who is the chief investment officer of the discretionary wealth management firm – said 2019 is looking like it will be a “land of confusion” with no clear outcomes in sight.
“It might well sound cowardly,” he said, “but our key view is that the outlook for the year ahead is as ‘confusing’ as it has been for some years.
“We expect the immediate future to be highly unpredictable as the confluence of a slowing economy, unsettled politics and increasingly attractive valuations throw up a range of different possibilities for the year ahead.”
Performance of global equities by calendar year
Source: FE Analytics
Becket argued that, despite the regular turbulence in the global economy over the last few years and political difficulties such as Brexit and Donald Trump’s ‘America First’ agenda, it has been “relatively easy” to decipher what has been going in markets with hindsight.
He described 2016 as “a great buying opportunity” after investors panicked about China and the commodity industries in late 2015. “As soon as you heard the nonsense being peddled in some quarters about ‘this is your last chance to get out’, you should have recognised it was a classic buying opportunity,” he said.
Likewise, a patient and considered approach would have worked through 2016’s other events such as the UK’s decision to leave the EU, the election of Donald Trump as US president and continuing political challenges in the eurozone.
Throughout 2017, investors were best served if they ignored the growing optimistic consensus that pointed to synchronised global expansion and a market boom in 2018. In the end, reducing risk and taking a more defensive tilt would have been the best approach by the end of 2017.
When it comes to 2018 the return of volatility meant that a more defensive stance would have been rewarded, especially in the latter part of the year. Becket said 2018 was the hardest year since 1901 to find positively performing asset classes; the performance of no major asset class has outstripped inflation rates.
“Of course, talking about the past is very easy. Trying to predict the future is always hard and at this time it appears particularly challenging. Interestingly, the wider consensus is now getting worried about economic growth in the year ahead and highlighting some of the negative trends recently exhibited in financial markets,” the Psigma chief investment officer said.
“While people are not necessarily wrong to be getting nervous, the time to take such a view was in 2017 and be proactive rather than reactive about a challenging year for markets in 2018. In recent months we have been actively reducing our protective element in portfolios ahead of an opportunity to increase risk in the coming months.”
International Monetary Fund’s economic forecasts
Source: International Monetary Fund’s World Economic Outlook, October 2018
Psigma Investment Management is forecasting a slowdown in global GDP growth to around 3 per cent. However, this does not necessarily mean that stocks will struggle to make progress as markets are typically good at pricing in future growth disappointments.
Becket said that the falls in UK, Asian and European stock markets in 2018 will “surely” have priced in at least some of the economic slowdown that is expected to come about. Indeed, he added that valuations in markets such as Asia could be suggesting a buying opportunity for long-term investors; Psigma currently has a preference for emerging Asia and Japan.
Furthermore, the chief investment officer added: “Even the much-hated UK equity market could offer up a surprising experience in 2019, particularly if there is a further deterioration in sentiment over our chaotic exit from the EU.
“Our views on the Brexit situation have not changed at all in recent months; we have long forecast that achieving any sustainable deal that pleased all sides was almost impossible and we expect a continuation of the fluid and volatile situation we have seen over the last two-and-a-half long years.”
Brexit should be seen as both an opportunity and a risk by investors, according to Becket. “It might well be that we wait for a further deterioration in sentiment (maybe wait for the lorries to start backing up on the M20 from Dover),” he said.
“But with UK assets now distrusted and shunned by most global investors and approaching historically cheap absolute and relative valuations, investors should not throw the towel in on their UK investments.”
In addition to the UK stock market looking cheap because of Brexit, he suggested that there is a ‘Brexit premium’ in the UK’s high quality fixed interest investments that investors can take advantage of.
Becket pointed out that UK companies are being charged around 1 per cent higher to issue debt than their global peers because of the country’s looming exit from the EU and the possibility that the Labour Party’s Jeremy Corbyn stands a chance of winning a general election, should one be called before 2022.
“Whilst we think the political factors are a potential threat to profitability, we don’t see them as structural solvency risks and this allows us to reap the rewards caused by other investors’ nerves,” he explained.
Performance of indices over 3yrs
Source: FE Analytics
So, how should investors play the coming year, given it is likely to be one where the outlook remains confusing?
Becket said they should keep their eye on the long term and not overlook the opportunities created by active management. His advice boils down to ignoring the noise, focusing on valuations and taking a contrarian approach.
“It would be naïve of me to say that risks do not exist, but likewise it would be wrong for me not to recognise that the reset we have seen in certain investments’ valuations offer great long-term return potential,” he concluded.
“It is also worth noting that after a lengthy period after the initial recovery from the financial crisis a decade ago, during which investors could simply own any index or asset and make a positive return, 2018 looks to have been an inflection point where active management and investment selection once again took on greater importance.”