With risk aversion spiking in Q4 of 2018 and global markets closing out the year in negative territory, volatility is again increasing, presenting planners and their clients with potentially more investment risks than they have experienced over the past few years.

This was the shared view of Charles Stodart – an Investment Specialist at Zurich Investments, and Akambo Financial Group Director and Head of Investments, Chris Willaton.

Speaking at the IMAP Investment Forum in January, Charles said the market was at the “ebb tide” of the economic cycle, with slow global growth, inflationary surprises, trade escalations, Brexit, benign bond yields and ongoing geopolitical concerns, all risks that investors, advisers and portfolio managers must carefully consider throughout 2019.

“According to the IMF, global growth expectations will moderate in 2019 to 3.5 per cent, with GDP growth forecast for the U.S. at 2.5 per cent, the European Union at 1.6 per cent, China at 6.2 per cent and Australia at 2.8 per cent,” Charles said.

Specifically, Charles believed when it came to portfolio construction, there were six key issues that portfolio managers should pay closer attention to throughout the year. These are:

1. What path will the Federal Reserve take?

According to Charles, the key fundamentals for continued growth in the U.S. was good, with employment strong and wage growth hitting 3.2 per cent. However, with inflation starting to rise in the U.S., the Fed was becoming less accomodating to holding interest rates.

“The Fed has indicated that it is essentially on hold this year with rate rises, but I think this is optimistic,” Charles said. “Given the strong growth in jobs and wages, I believe the Fed is likely to hike interest rates once or maybe twice this year.”

2. What is the price of money?

While the European Central Bank, Bank of England, Bank of Japan and the Reserve Bank of Australia were likely to hold their official cash rates throughout 2019, the U.S. Federal Reserve may be forced to raise its cash rate to deal with increasing inflationary pressures on the economy.

3. Earnings growth slowing

Charles believed that the continued pressure on wages growth would put additional pressure on companies to deliver real increases in wages. As a result, he said company earnings were likely to slow down this year.

4. How quickly will China’s GDP growth slow in 2019?

With China still recording an impressive growth rate of about 6 per cent, Charles said the Chinese Government was seeking to re-stimulate its economic growth back into double digits.

“But that’s a big ask,” Charles said. “At some point in time, projects that the Chinese Government invests in need to be economical and show some profit. And there’s no doubt that the U.S.-China trade war has been damaging to China.

“Based on these factors, I believe China’s GDP growth will likely stay around 6 per cent.”

5. What’s in store for Australia?

Charles said there were many factors affecting the local market that portfolio managers needed to consider in their portfolio construction. These included:

• The fallout from the Hayne Royal Commission, including its recommendations for the industry;
• Banks tightening their lending criteria, which has already been felt in the housing market;
• The outcome of the upcoming Federal election, and the implications that a Labor victory might have on investment policy, like negative gearing and franking credits.

“These are the types of issues portfolio managers and investors need to think about,” Charles said. “Banks have forecasted falls in housing prices of 10 per cent, whereas others think this is more likely to be in the order of 20 per cent. And while Australia’s unemployment rate is very good at 5 per cent, nonetheless, I feel the first six months of 2019 will be difficult from a GDP perspective for Australia.”

6. Geopolitics

Charles emphasised the importance that geopolitical events can have on the global economy, and believed there were four in particular that currently stood out for Australia. They were:

• The recent U.S. Government shut down pitted President Trump’s will against Congress, which highlighted the difficulty Trump may have working with a Democrat majority Congress.
• The U.S.-China trade war is continuing to negatively impact market confidence.
• Brexit has created a lot of uncertainty, both at a political and economic level.
• President Trump remains a wildcard on the global stage. His unpredictability and volatility is unsettling for markets and global confidence.

What’s in store for 2019

Akambo Financial Group Director and Head of Investments, Chris Willaton agreed with Charles’ six key issues currently dominating the market from a portfolio management perspective.

And while agreeing that increased volatility will be a feature of the market throughout 2019, Chris outlined his seven trends for the Australian market. They were:

• There are opportunities in equities, but be selective;
• Expectations for risk asset re-set;
• The importance of an active approach to manage risk-reward;
• Low absolute returns from bonds and cash;
• Expect more volatility as the investment cycle matures;
• Heightened volatility means more investment turnover; and
• The Australian regulatory landscape will change.

The IMAP Investment Forum is a community of interest for dealer group researchers, investment teams and independent researchers, where they can hear and learn from specialist portfolio managers and chief investment officers of advisory businesses. These experts and advisory professionals provide their insights on the practical issues involved in implementing managed accounts in an advice business.