What lies ahead for 2019?

As 2018 splutters to an end investors can look back on a year of two halves. Or to be more accurate, it was a year of three-quarters and a quarter.

After recovering from a short – but sharp - bump down in February, global share markets continued on the generally smooth upward trend of recent years.

But almost exactly on the three-quarter mark as the calendar flipped over to October, equity markets developed a severe case of the wobbles.

October has a bad reputation among share investors with several historically significant market crashes linked to the month. In fact, the ‘October effect’ has earned a place in the large dictionary of investment jargon.

The ‘October effect’, though, has been shown to be more statistical noise than historical fact.

According to the financial information website Investopedia, the October effect “was mostly a gut feeling mixed with a few random chances to create a myth”.

However, Investopedia says it is true “that October has traditionally been the most volatile month for stocks”.

“... research from LPL Financial, [shows] there are more 1 percent or larger swings in October in the [US stock market index] than any other month in history dating back to 1950,” the website says.

And on that score October didn’t disappoint with share markets across the world – including the NZX – gyrating wildly during the month.

For example, after racking up gains of around 11 per cent for the nine months to the end of September, the NZX promptly gave back most of those returns in October with the index often experiencing daily market swings of 1 per cent or more either way.

While the NZX has recovered slightly from the October low,  for the year-to-date, it has eked out growth of just 3.65 per cent (as at 18 December 2018).

And we got off comparatively lightly. Major share markets in the US, UK, Australia, Japan, China, and Europe have all experienced negative returns for the year to date.

Most professional investors expect that volatility is here to stay for a while.

For example, the world’s largest bond investment firm, PIMCO, notes in its latest outlook report that the year ahead will likely feature a “synchronized global slowdown”.

 

As investors absorb the news of lower returns in the future “heightened volatility [will be] one indicator”, the PIMCO report says.

The NZ arm of global firm, Russell Investments plays on similar themes in its market outlook for 2019.

“Volatility returned in 2018 and likely will continue into 2019,” the Russell NZ report says.

So what should investors do in the face of such uncertainty?

“There are no easy choices,” according to Russell.

“Cash returns are low everywhere, the U.S. equity market is overvalued,” the report says while corporate bond markets look increasingly fragile in an environment where company profits could be squeezed.

“Government bond yields are under threat from late cycle inflation pressures,” Russell says.

The Russell report is also not particularly upbeat about the prospects for the local economy over the next 12 months.

Economically, Russell says NZ “continues to face the challenges of falling population growth, a slowing housing market and depressed business confidence, which is being driven by uncertainty around future government policy”.

Investors will no doubt already be seeing the effects of market volatility in their portfolios. KiwiSaver members, for example, may for the first time in years notice falling balances.

And while the increasing volatility, and subdued outlook, may have put investors on edge, no-one is advising panic. Nonetheless, the changing market tune could be a reminder for investors to check their portfolios are suitably adjusted to personal circumstances.

Retirees, for instance, typically have a more balanced exposure to shares than younger investors and should be able to ride out market volatility easier. The likely bumpier journey ahead will be smoother for retirees who have, at least, the cushion of NZ Superannuation payments to rely on.

Other guaranteed sources of income, like the Lifetime Income Fund can also help retirees absorb whatever turbulence lies ahead. Lifetime's fortnightly income payments are insured and guaranteed for the investor's life, regardless of what happens to interest rates or investment markets during their retirement.

So while the late 2018 burst of volatility brought risk back into view for many investors, their vision should always be firmly focused on their own investment horizon.

Volatility returned in 2018 and will likely continue into 2019

 

 

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