Alexey Andrievsky: investment forecast for 2019
If we omit the main political events affecting global stock markets, such as Brexit, the suspension of the U.S. government, trade wars, sanctions against Russia, etc., then you should pay attention to two things that will affect our investment behavior in 2019. These are a) a slowdown in the growth of the global economy and corporate incomes, and b) the policy of the U.S. Federal Reserve regarding further rate increases.
A reduction in the growth rate of the world economy over the next decade was described in the OECD (Organization for Economic Cooperation and Development) forecast in the middle of last year. The forecast contained clear indications of a slowdown in the Chinese economy, the main growth leader of recent years, as well as the rapid expansion of India. In general, the OECD concluded that, during this period, the world economy will slow down its development, so there should be no special surprises.
The rapid churning of markets, due to the unprecedented cheap money policy, is coming to an end and we are gradually moving into the “cooling down” stage, with a more thorough assessment of the value of investment assets and risks.
Fear of recession
According to consensus forecasts, the risk of recession, the slowing down of the global economy by 2021, could be 55%.
As the practice of recent years shows, any forecasts and trends can be worked out very quickly. The process proceeds like a surgical operation. Markets are able to instantly drop the ballast of overvalued or toxic assets, and this, once again, shows why it is important to pay close attention to the quality of the investment portfolio.
Of course, first of all, we take into account the risk of trade wars, primarily between the U.S. and China. We do not believe in a quick solution to the problems that have arisen in recent decades. This protracted war (or negotiations – call it what you want) has no end in the near future, and, apparently, third parties will get the benefit here, not the participants of the confrontation.
Secondly, we are closely following the situation with Brexit and indicators of Italian banks. In general, in the light of the approaching recession, we believe that the economic integrity of Europe will be seriously tested, similar to what we saw during the insolvency period of Greece and the collapse of the Cypriot banks five years ago.
Fixed income investments
As U.S. rates rise, short-term bonds look very attractive. This picture can be observed until the end of the cycle. We would also prefer to invest in securities of the National Bank of Australia, New Zealand, Norway, the United Kingdom and Canada.
Minerals markets, non-renewable resources of the earth, often evaluate unfairly due to policy interventions. Efforts, primarily from America, to cheapen the necessary resources lead to their excessive consumption, on the one hand, and to a lack of incentives to explore new deposits, on the other hand. This may lead to a sharp increase in the cost of minerals in the future.
We are optimistic about investments in the mining sector, in the long-term.
Investment portfolio diversification
In a period of turbulence in stock markets, great attention should be paid to diversifying the portfolio. Everything is evaluated through the prism of currencies. Our preferences remain: the U.S. dollar, the Australian, New Zealand and Canadian dollars, the Swiss franc, the British pound and the Norwegian krone, with a margin of perhaps more than 50% in favor of the American currency.
These securities can take up to half of the investment portfolio, with a large bias towards U.S. government bonds. Fixed returns will reduce risks and allow you to receive coupons on a regular basis.
We prefer shares of large international companies with a transparent business model, a predictable good dividend policy and high growth potential.
We do not invest in American high-tech companies because we believe that the value of shares in this sector is too high.
Gold has always served as a safe haven for investors in times of unrest and total distrust of the markets. The surge in activity on the yellow metal, which we can observe in the first quarter of 2019, may be associated, primarily, with the upcoming Brexit, as well as with the instability in Venezuela and the continuing friction between the United States and China.
Yet, we still do not focus too much on this asset. The markets are in a cycle of rate hikes. Gold can be interesting during the peak of the recession, rather than the downturn. From the recent history of the recession of 2007–2008, we saw that, at the beginning of the slowdown in economies, gold behaved quite stably, until the banks began to drop it to replenish cash reserves, collapsing the market by 30%. Then began a sharp decline in rates to artificially cause inflation and business activity, but cheap money flowed into gold as a financial shelter, dispersing the price benefit.