Last year I said, “There will not be many easy gains to be had in 2019”. Well, 2019 finished with markets having reached highs. The returns gained in 2019, in a well diversified portfolio, were quite spectacular.
2020, what might we expect? World tensions due to the trade war between China and the US, more recently tensions escalating in the Middle East, will probably slow the world economy.
Watching the UK general election, as I did, was staggering. A result nobody expected. The massive majority won by Boris Johnson and the Conservative Party, has eased the threat of a “hard Brexit”. Brexit though will happen. My view is that the UK getting out of Europe will present opportunities for Australia. The UK Pound is also likely to strengthen against the Australian Dollar. Companies with UK Pound exposure are likely to benefit as a result.
In general terms, expect lower than normal growth, low inflation and more volatility.
The risk of an outright recession in the US, the UK and Australia, is low but not out of the question. Bond markets have been predicting a recession within 18 months for the last six months!
The consequence of low interest rates has been to encourage borrowing and speculation rather than savings. Savers with portfolios have been forced to chase yields. This in turn could artificially inflate assets further. Long term, very low interest rates are not good for economies. We only have to look to Japan and Europe for evidence. So called “Zombie” companies can survive by paying much less for their debt. With normal interest rates Zombie companies do not survive allowing more efficient companies to make greater profits, create more jobs and invest more.
Low interest rates have also encouraged “buy-backs” rather than expansion. There were a lot of “buy-backs” in 2019.
As a strategy, Emerging Markets might do well in 2020, so I would encourage some investment in Emerging Markets.
I still favour the strategy of reducing the risk to your portfolio in favour of the steady gains that fixed interest offer. This strategy will be obtained by 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
- Ramsay has had a good year, up 26%.
- CYB now Virgin Money (VUK) also had a good year, up 7%.
International Shares
- Hold steady but consider increasing exposure to Emerging Markets.
Property
- Domestic real estate is likely to be patchy and, in my view, generally weak.
- Commercial property steady.
Interest Rates
- My view is that we should plan for increases.
Generally, keep investing in quality good yielding shares. Consider increasing your portfolios allocation to Emerging Markets and Fixed Interest.
I look forward to our next meeting and as always please feel free to contact me any time.
Yours Sincerely,
Steve Burge