Strategies for a maturing cycle

By UBS Editorial Team

As the economic cycle advances, investors will need to be ready for ongoing volatility. (UBS)

The 2019 investment backdrop is challenging, but with the right measures, the Chief Investment Office (CIO) believes investors can prosper.

A recession looks unlikely. Current rates of consumption, investment, and employment growth are not historically consistent with an impending recession, and we think the typical causes of a downturn look unlikely to materialize in 2019. Our base case is for inflation to stay contained, allowing central bankers to remain sensitive to growth. We don’t foresee a major fiscal policy shift or a commodity price shock.

There are growth opportunities and pockets of value. Economic and earnings growth are waning in aggregate. But this slowdown will not be felt uniformly by every country, sector, or company. We expect robust growth in firms exposed to secular trends like population growth, aging, and urbanization.

Most political risks will prove idiosyncratic. 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. While some risks, like a global trade war, require close monitoring, concerns about individual countries usually don’t upset global markets as a whole.

Sustainability solutions for investors. Investors can play a role in reducing sustainability challenges while earning returns commensurate with equivalent traditional investments. There is now ample evidence that sustainable investing does not hurt your portfolio.

Planning can help reduce uncertainty. Building a clear financial plan can assist investors in dealing with heightened uncertainty and limited long-term return potential, and is particularly valuable as the bull marketages. Understanding the implications of volatility for your portfolio and goals can help you avoid making rash and costly decisions.

Stay invested. Growth is slowing, but we do not expect a recession. We think that staying invested will pay off, although investors should prepare for greater volatility as the market may begin to anticipate an end to the cycle.

Be selective. Amid fading earnings growth investors should focus on companies exposed to secular growth trends, those already pricing in adverse scenarios or those with a track record of weathering downturns.

Diversify. Political and individual corporate risks will inevitably surface. Most, however, will prove idiosyncratic to individual countries and sectors, and can be avoided through diversification across a broad range of market drivers.

Plan. Now is a good time to build a clear financial plan. The Liquidity. Longevity. Legacy. (3L) approach, that we developed, enables investors to maintain a liquidity buffer to protect spending amid market volatility, while ensuring portfolios remain on track to achieve longer-term goals.