The difference between the two is one of the widest for many years. Are gilts expensive and shares cheap?
Brexit
It is reasonably simple to position for Brexit. However, the outcomes are binary. A good soft Brexit will lead to a strengthening currency and a mild stock market bounce – led by domestically focused stocks.
A hard Brexit will lead to a sharply falling currency and probably a stock market drop, though I do not think the dollar earners will save the FTSE this time. A soft Brexit is still the most likely outcome – despite parliamentary shenanigans – and therefore you want sterling assets and more domestically focused companies.
If hard Brexit is the outcome you do not want UK investments, and you want to avoid sterling. In that scenario any non-UK equities (or fixed interest) are what you want. So go global, but avoid Europe.
Global markets
There are not too many positives to look at in 2019 with growth slowing and populism rising – neither are good for markets. The US will continue to see good earnings growth, but probably half as much growth in 2019 as occurred in 2018.
Europe looks like it is stagnating, especially if there is a messy Brexit. As ever it is Asia, emerging markets and Japan that look interesting, both from a price perspective and a growth outlook – many markets are on multi-year lows.
Recent falls do create value though, and probably make equities a more enticing bet than at the start of 2018.
Bonds
It is hard to get excited about the outlook for fixed interest in 2019. The US has some attractive yields on offer, yet by the time that has been hedged back to sterling most of this excess return has gone.
As with equities, emerging markets look the most interesting opportunity after large falls in 2018. However, it is a gamble investing now while the path of US interest rates is upwards and a dollar squeeze is ongoing. But if you can live with the volatility today, it is probably worth opening a position, as timing the bottom is impossible without a huge amount of luck.
Property
Similar to bonds, commercial property also looks fairly anaemic. Coupon clipping is the most likely outcome for 2019, and if there is a Brexit shock then values could fall sharply and physical property funds may run into liquidity issues.
There are some bright spots in the market, but high street retail is not one of them and the problem with the bright spots is they look expensive.
The next few months will provide some nervous moments, but the key is to ride these out. Many equities look decent value for such a late point in the economic cycle and lots of bad news is priced in.
