2019 Outlook: active selection is essential

In the coming year, we expect to see lower correlations, higher volatility and lower returns, particularly for equities. Our 2019 outlook explores why active investing is likely to be essential.

Key takeaways

  • As the global economy becomes less synchronised and more divergent, investors should aim to be more active and selective
  • The US economy will likely slow after the effects of President Trump’s tax cuts wear off, but a divided Congress may not significantly alter his economic policy; no US recession is expected yet
  • Concerns over Brexit and the direction of European politics may reduce confidence and fuel market uncertainty in Europe
  • China will keep transitioning its economy to one driven by consumption and services, but it may be hampered by trade frictions and the emerging “tech cold war” with the US
  • With QE mispricing many asset classes, diversification alone may not be sufficient; contrarian ideas and out-of-consensus themes may come into favour

Higher interest rates in the US – and less quantitative easing from the US Federal Reserve and European Central Bank – will likely reduce liquidity and create higher market volatility for investors in 2019. Because navigating the markets successfully may take greater skill, we believe investors should consider actively selecting where to invest, rather than passively accept market returns – understanding there is no guarantee that any type of strategy will outperform.

The global economy – which has been doing fairly well – is likely to become even less synchronised and more fragmented. This would continue a trend that began in earnest in 2018 as market returns turned negative. Trade tensions and political uncertainty are set to be primary drags on performance, while high oil prices and tight labour markets in the US, UK, Germany and Japan could heighten fears of rising rates and inflation.

In recent years, investors have been able to follow the herd as markets have risen, but continuing that approach now will likely destroy value rather than create it. As we enter into a period of lower cross-asset correlations, higher volatility and lower returns – particularly for equities – active asset allocation and active security selection is likely to become increasingly important.

Next: Four key themes

 

Download full 2019 Outlook

Some or all the securities identified and described may represent securities purchased in client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The securities or companies identified do not represent all of the securities purchased, sold, or recommended for advisory clients. Actual holdings will vary for each client. FANG is an acronym widely used on Wall Street and among many investors; it stands for four high performing large cap technology companies – Facebook, Amazon, Netflix and Google (now Alphabet) – that are also household names. BAT is a similarly widely used acronym for three large cap tech companies in China: Baidu, Alibaba and Tencent.

Investing involves risk. There is no guarantee that active management will outperform the broader market. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

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