Slowing global growth and rising downside risk means reliability of return will be key, says Aberdeen Standard Investments head of diversified multi-asset Mike Brooks.
When Federal Reserve chairman Jay Powell warns that the next move in US interest rates is as likely to be down as up, it underscores how sensitive monetary policy has become to the weakening global growth cycle.
The rapid change of tone in Fed communication - just weeks beforehand Powell had signposted multiple rate hikes - was remarkable. But the Fed is not alone.
Confronted by a growth slowdown, central banks in developed markets have put policy tightening on ice. The European Central Bank has pushed its guidance on rate hikes back to 2020. Meanwhile, the Bank of England is on hold amid Brexit uncertainty, the Bank of Japan's framework for yield-curve control is on lockdown and the Bank of Canada has moved in a dovish direction.
Although China is adding targeted fiscal and monetary stimuli, that's in the context of an economy transitioning to slower growth. Even then, authorities express a continuing desire to keep a lid on lending in an effort to constrain shadow banking growth.
But we don't see this broad shift to easier financial conditions as a precursor to a fresh growth cycle. Developed markets are suffering from weakening demographics and heavy debt burdens, after all. Stocks appear overpriced relative to company earnings prospects, while developed market bond yields remain pitifully low.
Storm clouds lurk on the horizon, too, from the fading impact of US fiscal stimulus and the uneasy US-China trade truce to Brexit and political fragmentation in Europe. Geopolitical instability, trade protectionism and populist politics can further disrupt markets in 2019 and beyond.
We foresee considerable potential for financial market weakness. It's why we think investors should look to moderate their risk exposures. It is a good time to look beyond just equities and bonds - whose return potential has fallen and become more closely correlated.
Diversification is a way to moderate risks without necessarily sacrificing returns. The value of multi-asset investing is being able to combine asset classes with compelling yield prospects but different return drivers. This can smooth returns and reduce downside risk. It is reliability of return that will be key in coming years in the face of jittery markets.
Investors should be aware that past performance is not a guide to future results. The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.