Investors will be reviewing their portfolios and decisions need to be made. Darius McDermott suggests funds worth considering in the current climate.
2019 could be another difficult year for investors. The consensus is that a recession is highly unlikely next year, but the stock market does tend to act ahead of the economy, so it could be another volatile 12 months.
Investors may be best served by reviewing the make-up of their portfolios and perhaps rebalancing any biases, intentional or otherwise, that exist.
Choices for investors
Equities or bonds?
While global stock markets have fallen from their highs, I still prefer the asset class to bonds. The US economy is continuing to grow, which should be a positive for stocks and I fully expect the US central bank to continue raising interest rates, which should be a negative for fixed income. If government bond yields rise further, it may be time to re-enter the asset class. But, for now, I prefer bond funds that are positioned to be less sensitive to interest rate movements.
Developed or emerging?
Rising interest rates should support the US dollar and keep it strong, which is bad news for emerging markets. Coupled with the impact they have yet to feel from the trade war tariffs, emerging economies could start to slow and inflation could pick up. Long-term investors may like to take advantage of cheaper emerging market shares, but they may have to be patient for the rewards: 2019 may not be the year when we experience a rally. For now, I prefer developed markets, in particular Japan and Europe, where valuations are more attractive than the US on a relative basis.
Growth or value?
With the exception of one or two very short periods, growth stocks have outperformed value for the past decade. Quantitative easing from the world's central banks has created a somewhat artificial cycle. The result has been a longer period of rising stocks markets, but a more muted recovery than history would have suggested. This could well continue but, as quantitative tightening gathers pace and growth become less attractive, value stocks could make a comeback. I think that it is prudent to be “style-neutral” at this point, which could mean that investors need to top up on value holdings if they are currently underweight.
Large or small?
The biggest risk to the UK stock market at the moment is Brexit. If it is a hard exit, small- and medium-sized companies are likely to be hit harder than larger ones, as they are more domestically focused. In the same vein, if global stock market volatility is to continue, larger companies tend to outperform in the shorter term. So, at this late stage of the cycle, I prefer a higher weighting to large caps.
Funds that suit these scenarios
1. Investec Global Special Situations
Investec Global Special Situations is a high conviction, contrarian value fund focused on buying companies that are out of favour and that have fallen 50% relative to their index. It is one of a number of funds that are run by the Investec Value team.
2. Fidelity Special Values
Fidelity Special Values aims to achieve capital growth by investing primarily in unloved UK companies and waiting for them to come back into favour. Manager Alex Wright, who usually has a bias towards smaller and medium-sized companies, said recently that he is finding far more opportunities in UK larger companies than he has in the past.
3. Janus Henderson European Selected Opportunities
Experienced European equity manager John Bennett uses sector analysis in his process, focusing on under-researched opportunities. The resulting high-conviction portfolio of 50-65 mega- and large-cap stocks has neither a growth nor a value bias.
4. AXA Framlington Japan
This fund invests in companies with long-term growth prospects, independent of short-term news flow or what is going on in the wider economy. The team identifies thematic trends that generate ideas and inform their stock-picking. Recent themes include the globalisation of Japanese food, ageing populations, automation and the increased use of electronics in cars.
Darius McDermott is managing director of FundCalibre.