2018 has been a difficult year for investors, with both bonds and equities delivering negative returns – a rare event. The last quarter has been particularly painful for global equity markets, which have been driven down since early October on account of growing concerns over US-China trade frictions, the ramifications of tighter monetary policy around the world, and the potential for these to damage global economic growth. Other political risks such as a disorderly Brexit are also weighing on sentiment.
Looking forward, no-one can guarantee that there will not be further equity market weakness in the short term. However, it does seem that 2019 has every chance of being kinder to investors. Indeed, valuations are now more attractive and fears of a recession are hopefully overblown. Whilst the pace of growth looks set to slow, the global economy should nonetheless continue to grow in 2019 against a relatively supportive backdrop of low inflation. Furthermore, the bar for positive surprises is now set fairly low. Expectations heading into 2018 were broadly upbeat, resulting in a situation where most surprises were negative. In contrast, expectations and asset prices going into 2019 are significantly lower, which should increase the chance of positive surprises that could lift asset prices.
Over the long term, it seems very likely that global growth will continue to be dragged upwards thanks to rising populations, continuing innovation and productivity improvements. In turn, this should help equities to continue to deliver attractive long term returns – despite occasional periods of volatility such as this.