2018, all was going so well until October! Volatility had returned. There will not be many easy gains to be had in 2019.
2018 has seen interest rates rise globally. This in turn, has had an impact on Bond yields and the “risk free” rate to which assets are valued.
Looking to 2019, fundamentally the world looks in OK shape. However, 2019 might be a year when international fund managers look outside the US for gains. The world is not just made up of investment opportunities in the US, despite the views of Donald Trump.
The rise of populism is a concern, especially for the larger institutions that we have relied on over the years.
Last year I said that it may be time to consider buying bonds and fixed interest. I maintain this is still the correct strategy albeit with a caveat. The caveat being that the traditional diversification effects of bonds to equities may not be so successful in 2019.
As interest rates increase, the value of bonds will decrease. The cash rate, also referred to as the “risk-free rate”, is the rate to which assets are valued. When interest rates increase this may cause a rethink about the valuations of assets, in a downward direction. Investors will ask, “Am I getting adequate compensation for the risk of holding shares when I can obtain a good return from cash?”
My belief is that the strategy of reducing the risk in your portfolio in favour of the steady gains cash and fixed interest offer is the way to proceed in 2019. This strategy will be obtained buying bonds and fixed interest as the income from the growth assets (shares and property) that you currently hold builds up your cash account.
Australian Shares
- 2018 continued to see Telstra and the banks decline
- In 2018 resources continued to do well. Although Lithium miners declined.
- The Reserve Bank of Australia (RBA) is likely to increase rates in 2019.
- Finding value in Australian shares in 2019 is not as difficult as last year due to falls in 2018. I favour the banks, AMP, CYB and Ramsay.
International Shares
- As mentioned above, the world is not just the US and whilst a recession is not expected a slow-down is.
- Fund managers will be looking away from America.
Property (Commercial)
- Still likely to offer yield only on listed Real Estate Investment Trusts.
- Possible exception to this is well targeted direct property trusts with reputable managers. Beware the liquidity trap with direct property trusts.
- My thoughts on domestic real estate is that it is difficult to see what will spark a price increase. Interest rates are likely to increase and the community has high debt levels. Not generally conditions under which real estate prices increase.
Interest Rates
- Expect increases globally.
Last year I said I liked Amcor, AGL, Stockland, Retail Food Group (RFG), Brambles, Ramsay Health and for those not averse to some “spice” in their portfolio, Evolution Mining.
All the above picks, apart from Evolution mining, were down. RFG was a disaster and Brambles was flat.
The fact that a gold miner like Evolution mining increased in value, reflects the worlds assessment of risk. Gold tends to do well in a volatile risky world.
This year I recommend that you build up bonds and fixed interest, although where appropriate the banks are looking like good value. The Royal commission into the banks, due early this year, if favourable, will likely see the banks increase in value.
I continue to like Ramsay health and also CYB as a hedge against the UK pound Oz dollar exchange.
I look forward to our next meeting and as always please feel free to contact me any time.
Yours Sincerely,
Steve Burge