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Coutts’ four positions to start 2019… and four challenges to face

13 February 2019

The private bank outlines the major themes that it believes will affect portfolios over the course of the coming year.

By Gary Jackson,

Editor, FE Trustnet

The start of 2019 offers a “knottier environment” for investors to contend with although taking a nimble and flexible approach should allow them to navigate this year’s challenges, according to analysts at Coutts and Co.

In its outlook for the coming year, the private bank and wealth manager highlighted four areas of the market it has a positive view on but also warned that there are four key challenges that investors cannot ignore.

Mohammad Syed, managing director at Coutts, said: “Looking at the year ahead we see a world in flux. New forces are rising to challenge the economic trends of the previous decade as people process the consequences of technological innovation and global economic deregulation.

“In the meantime, the divergence of global growth and monetary policy between the US and all other nations that shaped 2018 is a naturally unstable situation that can’t endure for long.”

Syed added that there are a number of positions that appear attractive at the start of 2019 – three of which performed strongly in 2018 and one that struggled. He added that “these ideas look good right now” while noting that the bank is ready to change them if the market mood shifts.

Performance of indices over 5yrs

 

Source: FE Analytics

The first position Coutts is standing by in 2019 is Russia. As the chart above shows, Russian equities have lagged broader emerging and developed market stocks over the past five years; that said, MSCI Russia was down just 0.70 per cent (in sterling) in 2018, compared with an 8.71 per cent fall in the MSCI World and a 14.58 per cent drop in the MSCI Emerging Markets index.

“Coutts’ positive view on Russia performed well in 2018 while maintaining a relatively low allocation to the broad emerging markets, which struggled against dollar strength and trade jitters this year,” Syed said.

“The year ahead will be about finding the opportunities like this within sectors rather than taking broader sectoral positions. But the market backdrop is febrile – Coutts’ view on Russia remains positive, but portfolio managers are watching oil prices where a change in direction could see a change position.”


The private bank also likes Japan, although this was an underperforming area of the market in 2018 as the Topix fell close to 16 per cent. Much of this was put down to external issues such as monetary tightening and the US-China trade war rather than domestic factors.

However, Coutts continues to have confidence in the long-term outlook for the country, which is still working through the wide-reaching reforms of prime minister Shinzo Abe. Fans of Japan note that the country has an expanding economy, stable government and improving returns on equity.

“Japanese companies are very profitable, earnings growth is positive and corporate reform is advancing, albeit at a gradual pace,” Syed added. “Japanese equities are also cheap compared to other developed markets.”

Healthcare is another area favoured by Coutts at the start of the new year. As the chart below shows, this was one of the few global equity sectors to make a positive return last year.

Performance of indices in 2018

 

Source: FE Analytics

“Healthcare has been another positive contributor in 2018 that will continue in to 2019,” the managing director said. “The long-term drivers remain in place and there is substantial innovation coming that will drive returns for investors.”

The final position that the bank is positive on is gilts. The Bloomberg Barclays Sterling Gilts index made a 0.50 per cent total return in 2018, compared with the 9.47 per cent fall that hit the FTSE All Share.

“While potential long-term returns are still low, Coutts see two advantages to holding gilts for the start of 2019,” Syed explained.

“Firstly, they are a hedge against certain unpredictable events, for example an Italian budget crisis or a difficult Brexit. Additionally, they provide liquidity in portfolios to allow portfolio managers to move quickly to take advantage of opportunities as they become apparent.”


Turning to the challenges facing investors this year, Coutts starts with the ‘tug of war’ playing out between the US and China. The bank pointed out that an escalation of the trade conflict between two superpowers could dent global growth in 2019 and 2020.

This would create an obvious headwind for equity markets, with cyclical sectors – or those with high exposure to global growth – and emerging markets being most at risk.

Coutts believes European stocks, which are heavily exposed to emerging markets, to suffer in this scenario while regions like Japan that have a stronger internal market could prove more resilient.

When it comes to emerging markets, the bank noted that there are other challenges that the US-China trade war. The strong dollar and slowing growth in China are also factors that could further dent sentiment towards the asset class.

The third headwind highlighted by the bank concerns “a spectre stalking the eurozone”.

“It is impossible to completely rule out political risk in Europe and 2018 was a good reminder why,” Syed said. Last year saw a number of political issues in Europe, with the Italian government’s stand-off with the EU over its budget being the one that drew the most attention.

Finally, Coutts pointed out that Brexit will continue to cast a shadow over investors until the March deadline. However, assuming a Brexit deal is agreed, some uncertainty will be lifted and the UK economy could rebound slightly.

“This would naturally benefit domestically orientated companies, but also encourage global investors to reconsider UK equities,” Syed concluded.

“Valuations are attractive and Coutts thinks that UK equities have the potential to do well in the scenario of a slowing but resilient economy, partly because the market is composed of a relatively high proportion of the defensive companies. The biggest risk to this outcome is a rapidly rising pound that would hurt the earnings of UK companies that derive earnings from overseas.”

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