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January 2019

An investor’s guide to 2019

Christopher Dhanraj
Head of iShares Investment Strategy

Our investor’s guide to 2019 turns insights into investable action with ETFs.

A new year begins, and with it comes risks, uncertainty – but also opportunities. For investors, it’s an occasion to adjust portfolios, prepare for the year ahead, and answer the questions: What do I need to know about the markets, and what could I do about it?

To answer these questions, we highlight three themes we believe will drive the markets in 2019.

1. Slowing global growth

What to know: We expect to see a slowdown in economic growth across key countries and regions around the globe, including the U.S., China and Europe. One exception is Japan, where growth has been ticking up, although from low levels.

Despite a broader slowdown, U.S. growth is stabilizing at a much higher level than other regions, even as the effect of fiscal stimulus fades. U.S. companies are demonstrating cautious corporate outlooks due to slowing economic growth and uncertainty around trade tariffs. Earnings growth appears likely to be more moderate.

What to consider: In this climate, we favor minimum volatility, large cap, and quality strategies. Quality, defined by companies with strong cash flow, growth and balance sheets, is key as economic cycles mature—a phase we believe the U.S. could be entering.

Certain sectors have also historically provided resilience in mature cycles. For example, healthcare has shown lower sensitivity to slowing global growth.

2. Interest rates nearing neutral

What to know: U.S. interest rates are en route to neutral – the level that historically has neither stimulated nor restricted growth. We anticipate the Federal Reserve to become cautious as it nears the neutral rate (which we currently expect to be about 3.5%) and pause its quarterly pace of rate hikes amid slowing growth and inflation in 2019. That could mean potential relief for assets – particularly bonds – that have struggled as the Fed raised rates.

What to consider: Rising interest rates have made shorter-term U.S. bonds an attractive source of income. Short-term U.S. Treasury Bonds now offer almost as much yield as 10-year U.S. Treasury Bonds and the picture is similar in the broader fixed income market. However, don’t dismiss longer-term bonds – we favor them as a portfolio buffer against any late-cycle growth scares and a potential source of capital gains should the yield curve invert.

3. Balancing risk and reward

What to know: Sound investing always requires a sensible balance of taking the appropriate risks to achieve one’s goals. As we head into 2019 that balance will be more important than ever. In 2018, increasing economic uncertainty (primarily around rising trade tensions) was a major drag on stocks, even though many companies had strong fundamentals. Looking forward, we see a place for quality assets in portfolios that may offer resilience if things get bumpy – but also those that offer upside potential should market fears about trade or growth level off in 2019.

What to consider: We currently favor a "barbell" approach, which is an investing strategy pairing low- and high-risk exposures together (hence the term barbell). For example, exposures to government debt or quality stocks as a potential portfolio buffer, combined with allocations to assets that offer a higher risk/return prospect. We see emerging market stocks as good candidates for the higher risk end of the barbell, with the greatest potential opportunities in emerging market Asia.