Top 5 Investment Themes To Watch For 2019

Move over 2018

2018 was action-packed and volatile with global equity markets, geopolitics and populism dominating the year. The result was that almost all asset classes, with the exceptions of cash and government bonds, posted negative returns.1 A lot of the same themes seem likely to play out in 2019. A significant difference, however, is that the year has begun with widespread investor pessimism, in contrast to the prevailing optimism at the beginning of 2018. From a contrarian perspective, I'm always more comfortable when markets start the year with a bearish bias.

Here is my countdown of the top 5 investment strategy themes for 2019.

Top 5 countdown

5.) Brexit will probably be ok.

We're in the messy final stages of the Brexit process. It looks to be going to the wire, with a range of possible outcomes. These are: a negotiated agreement, a further delay, an election, another referendum or a no-deal exit. It's tough to pick which it will be, but a soft-Brexit deal looks the likeliest. This outcome could see the sterling rise in its fair value against the U.S. dollar, which we think is around 1.40.2 This is not great news for the FTSE100, which depends a lot on overseas earnings, as a rising pound will keep it under pressure. But UK shares do not look expensive.

The economy isn't about to take off, but we think the Bank of England will probably manage one or two rate hikes if Brexit is indeed okay. 10-year gilt yields have bottomed, but like long-term government yields, we don't think they are going to rise a lot. Our model puts fair value for gilts at 2.2%--and this is probably about where yields will rise towards.3

4.) Italy is very scary.

Italy has the potential to go very wrong. According to the International Monetary Fund, Italian government debt is roughly 130% of GDP and the economy hasn't grown in the last decade, in fact, it is still 5% smaller than 10 years ago.4 In addition, the banks have a lot of bad debts and the government is a very unstable coalition of the right-wing populist Northern League and the left-wing populist Five Star movement.

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Disclosure: Opinions expressed by readers don’t necessarily represent Russell’s views. Links to external web sites may contain information ...

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