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It is seriously time to look at your risk profile and asset allocations

Firstly a quick recap of 2019. Two stories dominated; the US-China Trade War and Brexit. Interestingly neither had a negative effect on markets. Stocks were up strongly and the dollar and sterling both appreciated over the year. The year to date stock appreciation numbers are a bit misleading as November and December 2018 saw big falls which were reversed in January 2019.

So a better guide is the eighteen month data.
EURO Stocks 50 Year to date +23%
S&P 500 Year to date +26%
FTSE 100 Year to date +10%
ISEQ Year to date +19%

EURO Stocks 50 from Sept. 2018 +10%
S&P 500 from Sept. 2018 +8%
FTSE 100 from Sept. 2018 +0%
ISEQ from Sept. 2018 +3%

US Dollar versus Euro year to date +2.3%
GBP versus Euro year to date +5%
Gold year to date +15%

In 2019 stock markets are showing serious gains but taken in context with the 2018 correction, gains are modest over the last fifteen months. Currencies are virtually flat but the surprise is gold with a healthy 15% return.

Heading into 2020 the two stories that dominated this year will be in focus again. I thought that after the UK election we could expect Brexit to take a back seat while trade deals were being negotiated. However Boris Johnson has inserted the threat of a crash-out if the trade deal deadline (end 2020) is not met. Effectively he has consigned the UK economy to another year of uncertainty. Brexit is all well and good but a crash-out, as everybody knows, is a leap into the unknown. The markets along with business leaders were happy when no-deal was removed. It will stall many investment decisions now that it is back.

So the Sterling rally and the pick-up is asset prices I expected may not materialise and the UK economy could stagnate in uncertainty for another year.

The big event in the US will be the election. Yes Trump is impeached but that is a political issue and not a market mover. Trump will do everything in his power to get re-elected and that includes trying to influence the Federal Reserve to lower rates and the dollar, all good for stocks.
Whether the Democrats can rally round a candidate to beat him I do not know. So the prospect of another 4 years of Trump is possible and a Trump/Johnson buddy show is possible too, God forbid.

The one worry in the run up to the election is the funding of the manifestos on both sides. There is no money in the coffers to pay for electoral promises so the likely scape goat is the big tech stocks. Promising to tax them may be on the agenda. If that is the case, their stock prices could be in for a tough year.

Add to that the recent tensions escalating in Iran. This is a story not planned for and out of left field. Trump’s actions here are yet to be defined and the upcoming weeks will tell a lot. Certainly the markets have taken a negative stance with safe haven assets (gold and the Japanese Yen) the big winners. This could develop into a very big story but as yet the market reaction is muted. Oil is up but there is as yet no disruption to supply, so that looks like a temporary reaction. Iran has promised revenge and that action plus the US reaction will determine the seriousness and longevity of this story. Either way I do not see a full blown conflict, that is in no one’s interest.
In Europe We have a change of leadership at the ECB. Christine Lagarde takes over from Mario Draghi. I do not expect substantial change from the accommodative monetary policies Draghi pursued. Yes, the Germans are starting to baulk at negative interest rates but with growth so low in Europe I suspect Lagarde will be slow to change policy. She may even go for more QE and lower rates! Either way very low rates are set to continue for years yet.

In Ireland we are still punching strong growth. The economy is very robust and despite the uncertainty around Brexit the outlook is very positive. Being the only English speaking country in the EU will bring benefits and any company that can supply goods to the continent, currently being purchased from the UK, have a great chance of pinching that trade. Regardless of the outcome of Brexit trade talks, doing busing with Ireland will be far more attractive to our European partners than doing business with the UK.

Tax receipts are booming and Pascal will also benefit from the lower cost of funding the National Debt. This year 14billion of debt matured replaced by borrowing with a 0.9% yield. A serious saving from the original borrowing cost. Next year 17billion of debt matures from rates of 4.75% and will be replaced by borrowing costs of circa 0.5%. There’s a billion a year in savings alone. I hope they spend it wisely!

The only nasty on the agenda is the threat of a no-deal Brexit. The fact it is still an option may stall investment decisions in the UK and keep the Euro/GBP rate artificially high. On the other hand UK companies will be inclined to have a presence in the EU and Ireland will still be a preferred destination. All in all, I see no reason to doubt the economy will produce another strong performance in 2020.

For investments and pensions the big challenge again, is the low interest rate environment. For cautious investors, which may be 50% of the market, holdings of bonds in a portfolio, which are designed to reduce risk, but carry no yield, mean you are very unlikely to see any return.

Standard Portfolio example:

50% Bond Holdings: Yield 0.0%
50% Stock Holding*: Yield 7.0%
Average Yield: Yield 2.5%

Fees and charges circa 2%, Inflation 1.5% (*estimated annual return, not guaranteed)

It is seriously time to look at your risk profile and asset allocations.

Investment in equities still looks good for 2020 and emerging market bonds are also attractive. For those who want a fixed 5-6% guaranteed asset backed return, social housing 20 year leases are available, where your tenant is the local authority. That is proving very attractive to depositors and pensioners.

Peter Brown is Head of Education at IIFT and Managing Director at Baggot Investment Partners (Baggot.ie)

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