What a great year 2019 was for investors. Globally, markets ended the year around 25% higher, a result few had expected at the start.
Once again, the doom-mongers have entered January in full cry. The US-Iran stand-off has only added to their fears. I’m retaining my usual optimism, but it’s worth looking at some threats to your wealth.
Online platform AJ Bell has just listed the five biggest worries we may have to face. There will always be things to fret about, so how seriously should we take them?
1. Oil price spike
Plenty were fretting about oil price following the deadly US drone strike, with Brent crude touching $71 a barrel. AJ Bell investment director Russ Mould said: “If oil jumps by more than 50% year-on-year the global economy tends to slow and if it doubles then a recession is rarely far away.”
How worried should we be? Brent has slipped back to $65, roughly at the same level as a year ago. I’m sleeping easily and staying invested in solid shares with good growth prospects and strong dividend yields, whatever the oil price.
2. US-China trade talks break down
Donald Trump’s trade dispute with China has triggered plenty of volatility although hopes for a resolution are rising, with a ‘Phase One’ deal expected by 15 January. Mould says markets could be hit by any delay, or if China struggles to yield on the vexed issue of its treatment of Western intellectual property. “Global trade flows are slowing and industrial transportation equity indices are lagging, which is not normally a good sign,” he warns.
Am I worried? A bit, but this is a long-running process and both sides stand to benefit from some kind of resolution.
3. Corporate earnings disappoint
Markets may have enjoyed a decade-long bull run, yet profit growth has been modest. Last year, the S&P 500 grew more than 20%, but corporate earnings rose just 4%, according to the Federal Reserve. Mould says today’s higher valuations could look exposed if we see a slump in trade or spike in oil.
This is my major worry too, as markets may have raced ahead of the underlying fundamentals. There are still some London-listed top buys out there, though.
4. Inflation spikes
Remember inflation? Today’s low-growth, low-inflation, low-interest-rate world has left investors scrabbling for yield, with equities a big winner as a result, Mould says. If inflation returns, markets could be in for a shock.
Frankly, I can’t see it. We look set for a third decade of low interest rates, as central bankers battle to keep GDP growing and many FTSE 100 shares’ yields are still well above the rate of inflation.
5. Tighter monetary policy
If inflation does surge, interest rates will follow as central bankers battle to stop the economy from overheating. That would hit markets, but Mould reckons this would be the biggest surprise of all.
I don’t expect monetary tightening this year. The US Federal Reserve is more likely to cut than hike rates, and the eurozone is in no position to tighten. This week, Bank of England governor Mark Carney indicated his willingness to cut, if necessary.
Of these five concerns, corporate earnings disappointments seem the most likely threat. I don’t expect global markets to climb another 25% in 2020, but I’m not gloomy. You need to think long term, in any case, and a market dip would be a great buying opportunity.
