Thus far, the start of 2019 has been marked by escalating US-China trade tension and various political / economic and regulatory uncertainties. It can be rather difficult to make sense of the current market.
If you intend to invest in anything at all this year, be sure to answer the following 3 quick but important questions to navigate 2019 successfully!
[Question 1] Will the bull market end this year?
The million-dollar question: will the bull market spiral into a bear market this year?
It’s been 9.75 years since the last bear market. We ought to be at the end of this cycle.
Yet, some experts think 2019 is more likely to bring a pause in the bull market, not an end. The global economy is still showing signs of good health. The US-China trade war is likely to be tamed in light of the 2020 presidential elections, with pressure from hard-hit small businesses and farmers.
Given the strong growth numbers in many economic metrics and a likely more tamed trade war, it is very unlikely that the market will spiral into a bear market this year. There just aren’t many indicators pointing to that as of now.
While one can safely invest at the moment, one should also continue to keep an eye out at any market indicators that might point to a bear market.
[Question 2] Is big tech still a sure win?
Given the uncertainty, it will be wise for caution-minded investors to practice defensive investing: investing in companies that can control their own fate – companies that have customer loyalty and price-setting ability.
While the big tech industry – specifically FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks – may seem like the obvious answer, be warned.
The FAANG stocks have signaled that they might not be able to grow as fast anymore. For instance, it is difficult to see how Facebook – whose stocks are trading at their lowest valuation ever – can substantially recover from their data and privacy scandals. At this phase of expansion, fewer companies can sustain the kind of growth they enjoyed a few years ago.
If the big tech companies aren’t sure win anymore, then what should you do as an investor?
Much work has to be done to identify less well known companies that, similar to FAANG, have customer loyalty and price-setting ability yet haven’t gone through years of hyper growth. Basically, you need to find companies that are big enough to have control but small enough to still be able to double or triple their user base in a year (i.e. 100 million users to 300 million users as opposed to 2 billion users to 2.2 billion users).
Having said that, it is certainly no easy feat considering how very few people foresaw the meteoric rise of FAANG back in their early days.
[Question 3] Where are the emerging bulls and dark horses?
Since picking a handful of companies (i.e. FAANG) to invest is no longer a sure win in 2019, what about picking a regional index to invest in? Where are the emerging bulls and dark horses? The answer may surprise you: Emerging markets.
Since emerging-markets indexes overall are in a bear market, this pick may come as surprise. Emerging markets have proven in 2018 to be volatile due to political, currency, and other risks. They fared poorly in 2018 due to fears of the impacts of the US-China trade war and debt crises in Argentina & Turkey.
However, this drop in valuations is an opportunity for investors to get into the emerging markets at a discount.
Furthermore, emerging markets offer high rewards as they still have much room to grow. The IMF projects developing economies to grow at 4.7% in 2019, compared to that of the industrialized world at 2.4%.
More on China
China especially, is still full of potential. China has the biggest market for AI and other technological products slated for release, such as self-driving cars.
China also presents a unique opportunity for digital platforms to expand as they, unlike many other countries, do not prioritise privacy.
Other Regions
US-proof Global Stocks, specifically those of Europe and Brazil, are also top picks for defensive investing. The idea is to invest in places that are on a different curve of their economic cycle compared to the US, so that we may catch their acceleration when the US economy begins to contract.
European stock markets have continuously lagged the US in the past 9-10 years. Meanwhile Brazil, which is very much off-cycle to the rest of the world, is a good place to visit when bull markets transit to bear markets.
Conclusion
It’s difficult to pick individual winners, so don’t. Those who’ll gain in 2019 will be those who can get their hands on the various industries and regions.
Market analysts have recommended owning funds or broad-based ETFs to ensure sufficient diversification and minimal human error in spotting winning moments.
Ideally, in 2019, one should diversify across U.S., Europe, Asia Pacific and Emerging Markets to mitigate single country/region risk and achieve consistent returns. Investors may also consider diversifying across Government Bonds which appreciate during heightened market volatility, another option available here.
Furthermore, emerging markets offer high rewards as they still have much room to grow. The IMF projects developing economies to grow at 4.7% in 2019, compared to that of the industrialized world at 2.4%.
Of course, for someone who is not in the finance sector, building a diversified portfolio may not be easy. 2019 is also the year when robo-advisor gains traction. Robo-advisors typically help investors build and manage very diversified portfolio at a very nominal fees (due to automation).
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