Anyone hoping that the New Year would bring a new mood in the markets has been disappointed. 2019 has started as 2018 ended, with falls in stock markets around the world.
The mood has been particularly gloomy in Asia where further evidence of a slowdown in China has hit sentiment. Hong Kong’s Hang Seng index closed 2.8% lower on the first trading day of the year while the mainland CSI 300 index has fallen to its lowest level since 2016.
That is the challenging backdrop against which we present our fund picks for 2019. It is hard to invest when all around are pessimistic but history suggests that this is usually the right moment to take the plunge.
It is certainly true that the last three months of 2018 have left many stock markets looking relatively attractive. And the funds we have chosen this year have been picked from the more out of favour regions.
The UK is out of favour for obvious reasons. With less than three months to go until Britain is due to leave the EU, the shape of our future relationship with Europe is as uncertain as ever. This has seen the FTSE 100 index fall to its lowest level since 2016.
UK shares are no higher than they were in 2013. Indeed, if you really want to depress yourself, the FTSE 100 was actually higher at the end of 1999 than it is today.
For a contrarian investor, this looks like a compelling opportunity to buy into the UK market when investors are focused on the bad news. With the dividend yield on the UK’s blue-chip index now close to 5% and shares costing just 10 or 11 times expected earnings on average, the UK looks unfairly out of favour.
We have chosen to play this valuation theme via a quality-focused fund, the Lindsell Train UK Equity Fund, rather than a cyclical value fund that might seem the more obvious way to make a contrarian call on the UK. We think Nick Train’s quality and growth focus will provide some protection if things don’t turn out as well as we hope but will still capture plenty of the upside if the UK does bounce back.
The Lindsell Train fund has not been immune to recent market volatility and this feels like a good entry point into the fund, which holds a small number of high quality companies.
The second fund recommendation is also in keeping with the cautious, contrarian approach this year. The Fidelity Global Dividend Fund, as its name suggests, invests around the world in shares offering a decent dividend income. Just as importantly it also focuses on resilient businesses that can offer the prospect of growth in that income and capital preservation too.
The UK is not alone in being out of favour today. Another deeply unpopular market is Japan, where share prices have fallen throughout 2018 despite corporate earnings holding up pretty well. The result of that divergence has been a sharp fall in average valuations in Japan, making this feel like a good time to get exposure to that market too.
Shares in Japan reached a 27-year high in January 2018 but have been a poor performer since as investors have worried about the deteriorating trade situation as the US tackles the threat from China and other big exporters like Japan have been caught in the crossfire.
Despite this, the prospect of recession in Japan this year is slim, the Bank of Japan remains supportive and deflation fears have largely disappeared. Japanese companies are much more shareholder-friendly than in the past.
Our preferred way into the Tokyo market is via the Baillie Gifford Japanese Fund. Managed by Matthew Brett, this fund has a focus on technological change, particularly robotics and factory automation, an area in which Japan has a big competitive advantage.
Our final fund recommendation is a relative safe haven for nervous investors. The Fidelity Select 50 Balanced Fund is a one-stop way of accessing what we consider to be some of the best funds on our platform - those getting the Select 50 stamp of approval. In addition to the underlying quality of its component investments, the Balanced Fund benefits from a split of assets between riskier shares and more defensive bonds.
Ayesha Akbar steered a steady course through the market turbulence of 2018 and the fund is available today for less than its launch price last February.
Investing in funds may seem counter-intuitive when the headlines are so negative and after a year of heavy falls around the world. As all contrarian investors know, this is precisely the time that the best investment opportunities become available.
We wish you well with your investments in 2019.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.