News and Views

2018 was a challenging year for investors with volatility rising in particular in the final quarter. This was largely due to increased concerns of a global economic slowdown, unproductive trade talks between the US and China and continued Brexit uncertainty, which will potentially have an adverse impact on the UK and European economies, at least in the short term. Of the major asset classes, only gilts and cash saw positive returns. Including dividend income, a broad index of UK equities fell by 10% over the year.

However, it was not all bad news for diversified investors. Infrastructure performed well with the £1.5bn acquisition of John Laing showing that institutional appetite for the asset class remains strong. Gold also performed well, demonstrating the benefit of
its inclusion as part of a balanced portfolio. We believe it helps to improve returns and reduce overall risk. There were also small gains in the US and Indian equity markets. Even in UK equities, the healthcare sector saw strong returns, helped by M&A activity.

Equities have experienced a more positive start to the year so far with improved optimism over trade prospects and a more relaxed attitude on interest rates with investors hopeful that central banks will act to support markets. With the odds of a no deal Brexit increasing, investors have focused on value opportunities in the UK market. Stocks with significant overseas exposure in particular have benefited as sterling remains at a depressed level.

Although central banks can keep interest rates low, this cannot by itself generate demand and create economic growth especially as we are already so late in the economic cycle. Much of the recent growth has been driven by unemployment levels falling to today’s low levels. However, in the UK, with the savings ratio at a record low level and lending growth rapidly slowing despite record low borrowing rates, the outlook for economic growth in the short term is muted. Even in the US, a key recent driver of global growth, some cracks are beginning to emerge. We believe weakness in consumer confidence, particularly with regard to future expectations, could be a cause for concern.

Although global growth is slowing down, we believe that we are unlikely to encounter a recession in this calendar year. Global growth of around 2.9% is predicted for the year, down from a likely outcome of 3.2% in 2018. But the best of the growth is likely to be seen outside the UK and Europe, specifically in the US and Emerging Markets. Given slower growth prospects, we believe the case for alternative investments, such as infrastructure, remains strong for certain investor. Investors are likely to place a premium on index linked returns, which are essentially backed by governments as underlying interest rates remain low.