I'm going to start this article by looking at emerging markets, which look pretty attractive to me.
I'm not the only pundit who likes the look of emerging markets (EMs) as we head into 2019. In the Goldman Sachs Asset Management 'Global Outlook 2019' document, the bank says that a 'period of growth moderation is likely behind us.'
The bank thinks that China may generate positive surprises and many EM countries - such as Brazil, South Africa and Russia are in the early stages of recovery.
And Nigel Bolton at Blackrock says that EM price/earnings ratios are well below their long-term average at around 11 or 12. He thinks EMs offer 'a combination of value and earnings growth.' The underlying EM growth rate in 2019 will be around 10%, according to Bolton. His favourite three EMs are China, Brazil and Indonesia:
"The common factors across those countries are reform and economic momentum, and the big risk is global trade."
The risk of the Trump trade war getting out of hand is the biggest risk for emerging markets in 2019, but it's not the only one. We could also have further 'idiosyncratic shocks.'
Such shocks have been a theme of 2018. Remember many pundits thought EMs would have a good year in 2018 but things didn't work out that way. Bolton's colleague at BlackRock, Richard Turnill, told journalists there were three reasons for this poor performance. Firstly, 'idiosyncratic shocks' such as President Erdogan's bizarre behaviour since he won re-election in Turkey in June. Secondly, the increasing geopolitical risk which showed up most strongly in trade tension. And thirdly, monetary tightening and the rising dollar. (A rising dollar hurts EMs because their debts are often denominated in that currency.)
The reality is that emerging markets are always riskier than developed markets and they're often more volatile too. But the good news is that Turnill thinks there may be fewer shocks in 2019 because there are fewer elections coming up.
Emerging markets also offer genuine diversification. Turnill comments: "Brazil and China have already had an earnings recession. That highlights that within emerging markets you have economies that are at very different stages of the cycle, and there are opportunities there that are much less geared into the global cycle."
It's also arguable that some investors are over-estimating the likely impact of any trade war on China. Citi reckons that 25% tariffs on US exports to China would reduce Chinese GDP by just over 1%. The bank also thinks that Chinese consumption should remain resilient at its current level. So that's not too bad.
On the downside though, both the private and public sectors have a lot of debt, and that won't be resolved easily.
Still, overall the big attraction of EMs is that shares are cheap. Trade issues will no doubt cause plenty of volatility in 2019, but now is surely a good time for long-term investors to buy in.
If you want to invest in emerging markets, I highlight some ETFs in Four top emerging markets ETFs.
Europe - excluding UK
Europe is the least attractive region for investors in 2019. The biggest problem is the political uncertainty. Macron is now weak in France and Merkel is on the way out in Germany. And Italy remains a worry. Granted, the populist government did agree a budget deal with the EU just before Christmas, but that's an issue that could easily flare up again in the second half of 2019.
A 'no deal' Brexit won't help either. BlackRock reckons there is "limited upside risk but hefty downside risk" in Europe and that seems sensible to me.
On the plus side, Goldman Sachs reckons looser fiscal policy should help growth and there probably won't be a significant tightening in monetary policy either. (In other worlds, policymakers are likely to increase spending and/or cut taxes, and interest rates probably won't rise.)
But GDP growth is still likely to slow down and earnings growth won't be great either. BlackRock thinks profits could rise around 5% compared to around 10% in the US and emerging markets.
I'm steering clear.
There's much to like about Japan. The market's forward price/earnings ratio is trading below its long-term average and parts of the market offer real value. There's an election due in April/May and the ensuing government might give another push to the reform programme that was started by Prime Minister Abe earlier this decade. What's more, Citi thinks that inflation will fall and the bank doesn't expect any interest rate rises.
What's more, Japanese consumers may go on a spending spree in the summer ahead of a rise in consumption tax in October.
That said, forecasters are a bit gloomy on economic growth. Citi expects GDP to only grow by 1.1% due to fall in overseas demand for Japanese goods and services. (As a big exporter, Japan would suffer if the trade war really got out of hand.) And when it comes to earnings, Nigel Bolton expects growth of only 5% or so.
But I remain positive because I think the 'Abenomics' reforms are making a difference and I don't think they're fully reflected in current share prices.
If you want to invest in Japan, check out Five top Japan ETFs.
In the first part of this series, I looked at what stage we're at in the economic cycle. It's pretty clear we're in the 'late cycle' stage. That may continue through 2019.
Given that background, is there any investment factor that we should tilt our portfolio towards?
Nigel Bolton thinks now is the time for quality, and US quality in particular. Quality typically does well at the late cycle stage and quality stocks should be more resilient than most if markets get choppy.
The problem is that a lot of quality stocks - such as Unilever and Procter & Gamble - are pretty expensive at the moment. You have to pay up for that kind of resilience. So I'm more drawn towards value.
Granted, value tends to do best when we're in the early recovery stage after a recession, and we're clearly not at that point right now. But value stocks are cheap relative to historical levels, and that attracts me. So I'm happy to have a small part of my portfolio invested in a few value ETFs such as the Vanguard Global Value Factor UCITS ETF | VVAL.
So that's almost the end of our look at what might happen in the investing world in 2019. At the end of 2018, it looks like we might be entering a bear market - technically the US is already in one - so it's a time when many investors will be nervous. I expect markets to be pretty volatile in 2019, and we may well see further falls. That said, selling out now in the hope of buying back later at a cheaper price is very risky and stressful. It's probably best to stay calm and hang in there.
And if you're thinking about making any fresh investments, consider emerging markets, value, and perhaps the US if share prices fall further there.
No doubt, there will also be some surprises no one saw coming. Expect the unexpected!