After nine US rate rises and the steady dial-back of central bank ‘QE’, investors are now starting to feel the swell. While US corporate earnings rose by more than 20 per cent in 2018, thanks to tax cuts and a domestic growth surge, equity market multiples fell by even more – the result is the first year of negative returns for the US market since the credit crisis and double-digit losses for Europe and Asia. For the first year in seven, US equity prices underperformed US corporate profits – market valuations are normalising but after a very strong 2017. 
Thin holiday season trading volumes likely exaggerated December’s market moves, but more frequent bursts of volatility across asset classes (we saw them in February too) will be a fact of investment life as monetary policy is regularised. Central bank support and near-zero rates have kept equity volatility (measured by the VIX index) at an average of 15.3 per cent over the last five years, less than three-quarters of the average level that prevailed in the twenty years prior to that, so some normalisation is inevitable. Typically, tighter money means lower valuations and lower real returns across all asset classes– so I fear 2018 was almost ‘text book’ in terms of the market response.
Our biggest worry for 2019, however, is the shorter maturity segment of the US Treasury yield curve is gradually inverting, indicating that we are ‘late’ in the economic cycle and hence face a rising risk of recession, although it does not provide a precise timetable.
My growth worries though are not in the West, where unemployment is low and consumer confidence and corporate profits are still robust, but in China. Economic visibility is poor with manufacturing survey data now looking consistently weak; for president Xi Jinping, president Donald Trump’s trade tariffs were not well-timed with the new export orders component of the PMI survey slipping to 46.6 in December, the worst since the depth of the China ‘growth scare’ in 2015.
Yes, the Chinese government will react (probably with tax cuts) but on a recent trip to the IMF by our Sarasin economist team, it was thought that this would offset only some of the trader elated drag. In short, global growth ‘ex-China’ will be difficult to achieve – hence, a more defensive equity strategy with an emphasis on sustainable dividend growth alongside higher than normal cash positions remains our broad policy until we know more.
The greatest opportunity for investors in 2019 is that the past year’s correction has left equity markets relatively inexpensive versus recent history. Cash and government bonds offer little yield competition to global equities. Central banks can certainly afford to be patient, so interest rate risk is modest whilst the price of oil and other commodities are subdued. Most compelling though is that our analysts are still finding many genuine thematic growth opportunities that will stand out in a slower growth world.
In particular, we see strong investment ideas emerging from our ageing theme; rich and poor world health services are slowly converging, assisted by rapid medical innovation, while in the US there is finally bipartisan support to prioritise medical efficiency. Climate change, while a huge global challenge, is also a large investment opportunity – offshore wind, solar, battery and emissions technologies are all part of our portfolios, while we see carbon neutral growth strategies attracting premium investor valuations.
The steady move to digitisation supported by AI (artificial intelligence) and ‘Big Data’ has been little interrupted by the selloff in technology stocks – indeed many new economy investments are now available at (or close to) old economy valuations.
Even the woes of the high street are a sign that many new consumption patterns and models are emerging – with this year’s sell-off taking the good down with the bad. Our buy list is full of growth at increasingly reasonable valuations.
Guy Monson is chief investment officer at Sarasin & Partners. The views expressed above are his own and should not be taken as investment advice.