Global sharemarkets (MSCI world index) fell nearly 14% in aggregate in the 4th quarter of 2018. 2019 has seen the same market return over 10%, reversing much of those losses. So, are we out of the woods?
It’s worth examining why sharemarkets fell in the first place. In 2018, global growth started to slow from the above trend, synchronised global growth seen in 2017, partly due to the ongoing US-China trade spat. At the same time, the US central bank was raising interest rates and removing other aspects of loose monetary policy (effectively reversing their quantitative easing program). Investors became increasingly nervous about higher interest rates and lower growth and as a consequence sold growth sensitive assets such as shares. Arguably, in late December this pessimism turned into panic and markets became oversold (i.e. pricing in a greater economic slowdown than was likely).
This year, economic data releases from major economies have revealed that there was indeed a sharp slowdown in late 2018. However, the US central bank has relented on its plans to further raise interest rates (for the time being) and there is hope that a US-China trade deal is forthcoming. This has emboldened investors to buy up risky assets such as shares and corporate bonds in spite of the slowing global economy.
We expect global economic growth to remain positive, albeit at a level below the growth seen in the past couple of years. We also expect that the economic expansion will continue to be bumpy as the global economy deals with myriad political uncertainties and low growth has a greater risk of being tipped into recession should an economic shock occur. Given this backdrop, we continue to forecast positive returns for sharemarkets, but the wild swings that we have seen in the past 12 months are likely to persist. In this environment, we think it is prudent to have lower exposures to risky assets such as shares (compared to a typically neutral position for a given fund). In addition, stock picking remains a key component of our investment approach, identifying and investing in companies that should deliver returns irrespective of the global economic environment.
Most importantly, we want to remind readers that investing is a long-term endeavour. Short-term market swings like we’ve seen recently are completely natural. This means investors who set long-term goals for their money and stay the course during times of stress, have the best chance of success.