Investing through the cycle

The traditional cycle is seven years of feast and seven of famine. As this interesting chart shows, however, the stock market works on a shorter time-horizon. Each line shows the performance of shares over one year, rebased to the same starting point. Calendar years are arbitrary time periods over which to look at investment performance, of course, but the divergence of the lines here makes a useful point about the difficulty of predicting where markets will go in any 12-month period and the necessity of sticking with it through the challenging years to ensure you benefit from the better ones that usually follow. 2018 has been the worst year in the past six for investors in a broad spread of global shares. 2017 was the best. Obviously, this is a small selection from which to draw conclusions, but it is notable how the gains achieved in the good years are significantly larger than the losses incurred in the bad ones.

Source: Refinitiv as at 31.12.18, total returns in local currency, figures rebased at end of previous year to 100.

The ups and downs of the technology rollercoaster

Technology stocks led the market higher and they have been the smoking gun for anyone trying to understand the volatility and overall weakness of the US stock market in the final three months of 2018. It really has been a year of two halves when it comes to the FAANGs. Investors’ love affair with all things technology soured for a range of reasons. Netflix probably just overshot - like Amazon it has still ended 2018 significantly more valuable than it started. With Apple, investors have started to worry that the company is over-dependent on one remarkable product that is now ubiquitous and increasingly expensive. Google-owner Alphabet and Facebook are struggling to justify their valuations in a world that is less willing to give big-tech the benefit of the doubt. More intrusive regulation, privacy concerns and stricter tax enforcement mean these companies will not have it all their own way from now on.

Source: Refinitiv as at 31.12.18 total returns in local currency, figures rebased to 100

Cash is back

For the ten years since central banks responded to the financial crisis by slashing interest rates, cash has been trash. As the chart shows, it was for a long time impossible to generate a decent income from a deposit. Since the Federal Reserve began normalising interest rates three years ago, however, cash has become progressively more competitive. Here, the 3-month Treasury bill’s yield is seen catching up with the average dividend yield offered by shares around the world. They are now neck and neck and for many investors the same income with considerably less risk to their capital will be a compelling proposition. Sure, there’s no prospect of a capital gain when you hold your money in cash or a near proxy but, after a ten-year bull market, that won’t bother more cautious savers.

Source: Refinitiv, as at 17.12.18

AcknowledgementsI would like to thank the many knowledgeable and experienced people within the wider Fidelity organisation who have helped me develop the ideas in this Investment Outlook. Although the views expressed here do not represent the shared opinion, or house view, of Fidelity’s investment team, the combined expertise of over 380 investment professionals in 13 countries is a very significant resource on which I have been able to lean. In particular, I would like to thank Gary Monaghan, Investment Director in Hong Kong, Jeremy Osborne, Investment Director in Tokyo, Leigh Himsworth, UK Portfolio Manager, Neil Cable, Head of Real Estate, Curtis Evans, Head of Investment Directing, European Fixed Income, Kasia Kiladis, Investment Director, US, Rebecca McVittie, Investment Director, Emerging Markets, Natalie Briggs, Investment Director, Europe, Bill McQuaker, Portfolio Manager, and Ayesha Akbar, Portfolio Manager.

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