Economic and political risks of 2019 force investors to think about capital protection and preservation rather than pursuing profitability. Trade war and the curtailment of the quantitative easing program (QE) by the US Federal Reserve led investors to withdraw money from developing countries. As a result, last year bond markets, which had previously shown steady growth over several years, have dropped. Indices that are focused on developing countries bonds lost from 4% to 6%.
Investors in Argentina and Turkey suffered the greatest losses: Argentine and Turkish indicators CEMBI declined at a maximum of 16% and 27% respectively. How to protect your portfolio from such unpleasant surprises this year?
In order to identify the most promising assets, we need to look at the events that will determine the situation in the financial markets this year. According to our expert’s opinion, there are three main risks for the investors in 2019:
– interest rate increase;
– Continuation of trade war between the United States and China;
– growing political tensions in Europe.
Financial markets have already felt to the fullest the impact of the first two risks last year, hence we would like to talk about the third risk in more detail. European economies will experience great difficulties due to large volumes of public debt against the background of a gradual tightening of the ECB’s monetary policy during sluggish economic growth period. Perhaps the biggest threat is Italy, which should refinance state debt in the amount of roughly € 300 billion.
In the period of rising interest rates this may be a problem that will affect the possibility of repayment of borrowed funds on time and therefore will affect the growth of the Italian economy in 2019. Just like in the period of the Cyprus crisis in 2011, problems can spread to other economies of the European Union. This will weaken European banks and could potentially lead to recessions in some countries.
Ways of protection
Taking into account economic and political risks it is better to give preference to defensive assets when forming your portfolio. The average portfolio of a conservative investor this year may look like this:
– dollar assets;
– shares of UK companies which lost in value due to Brexit but still continue to grow;
– stocks and bonds of Japanese companies that continue to improve corporate governance, which should lead to an increase in returns for investors.
Assets of developing countries should also be present in the portfolio, but in the small proportion of the total portfolio. Despite the fact that stocks of developing countries were under pressure during last year due to the tightening of monetary policy in the United States, they have good chances to recover this year, although it is a subject to a slowdown in US interest rates and a stronger dollar.