Challenge 1: Slower growth and tighter monetary policy

We anticipate slower global economic growth in 2019. US growth will be dented because taxes are not going to be cut again. Meanwhile, China faces tariffs on its trade with the US and needs to control its rising debt. Tariffs will have knock-on effects for its suppliers, including those in Europe.

Monetary policy is also tightening. Over the past decade loose monetary policy, in the shape of low interest rates and “quantitative easing” has created a rising tide, which has lifted all boats – stock markets, bond prices, and real estate values. But in 2019 that tide will start ebb. 2019 will be the first year since the global financial crisis that central bank balance sheets end the year smaller than they started.

Thinking of battening down the hatches? Here’s why we don't think it's time yet.

Solution 1: Stay invested

It’s been over a decade since the financial crisis, and stock markets are becoming more volatile . But we aren’t expecting a recession in 2019. Inflation remains contained, central bankers remain sensitive to growth and are raising rates in a measured way, and we think momentum should be sufficient to see us through some of the headwinds, such as tariffs.

This is good news because, historically, global bear markets have tended not to happen in the absence of a recession in a major economic region. So we think this is still a market in which investors should maintain a healthy allocation to equities. And in any case, trying to time the market tends not to pay off over the long term.

Challenge 2: Weaker overall earnings growth

Companies are unlikely to grow their profits as quickly in 2019 as they did in 2018. In the US market, which represents more than half of all global equity market capitalization, we expect profit growth to fall to roughly 4% in 2019 from a multi-year high of 21% in 2018. Meanwhile, we expect about 9% earnings growth in emerging markets and around 5% in the Eurozone. So how should investors respond to this slowdown?

Solution 2: Be selective

Economic and earnings growth are waning, but this slowdown will not be felt uniformly across every country, sector, or company, and there are still growth opportunities and pockets of value. For instance, we expect robust growth in firms exposed to secular trends like population growth, aging, and urbanization – think medical device companies, those developing financial technology products, or those pushing the frontiers of space travel.

Meanwhile, some assets have already begun to factor in a more challenging backdrop. In particular, we like global energy stocks and US financials.

Challenge 3: Political challenges

Political challenges span the globe. US-China tensions look like they run much deeper than disagreements about trade policy. And we face elections of note in India, South Africa, Greece, Canada, and Argentina. Europe will also vote for the EU parliament, US presidential campaigning will begin, while instability could also provoke a return to the polls for citizens in Italy, Germany, and the UK.

Individual issues, including but not limited to Brexit, North Korea, the Eurozone, and the Middle East, will inevitably surface at some point in the coming year. How can you navigate your way?

Solution 3: Diversify

While some risks, like a global trade war, bear close monitoring, concerns about individual countries usually don't upset global markets as a whole. By diversifying across a range of regions and asset classes you can reduce risk. Diversification means spreading your money across many different investments, across regions, asset classes, and companies, rather than sticking with just a few.

Challenge 4: Environmental credit crunch

The world continues to use resources in an unsustainable way, which is becoming an issue for financial markets as much as for the environment and society. Social media means corporate behavior is more closely scrutinized than ever, and companies have come to appreciate that consumers can vote with their wallets. Read on to learn how to invest in line with your values.

Solution 4: Go sustainable

Investors can play a role in improving sustainability while earning comparable returns to equivalent traditional investments. For example, investors could take advantage of the fact that a wealthier world is willing to spend more on such ecological goods as better air quality for its children. There is plentiful evidence that sustainable investing does not hurt your portfolio. Subscribe to download the full Year Ahead 2019 report to learn more.

Challenge 5: Limited long-term return potential

After a decade in which stock market returns have vastly outperformed economic growth and central banks have provided unprecedented support for bonds, the return potential for the future is now more limited. It’s important not to ignore these changing long-term prospects. You will need to keep this in mind when building financial plans for the future.

Solution 5: Plan for the unexpected

Life’s unpredictable; things don’t always turn out the way you’d like them to. What happens then? It’s this uncertainty that makes long-term financial planning so important.

Planning early gives you the best chance of meeting your long-term objectives and can help reduce uncertainty. A clear financial plan can help you navigate a time of heightened uncertainty and more limited longer-term return potential.

Our Liquidity. Longevity. Legacy. approach allows investors to maintain a healthy liquidity buffer to prepare for market volatility, while helping portfolios remain on track to grow toward achieving longer-term goals.