One of this column’s favourite market sayings comes from fund management legend Sir John Templeton, who once asserted that ‘Bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria’.

Applying this test can potentially help investors spot where value and future upside opportunities can be found and – just as importantly – avoid areas which are so popular they could be overvalued and capable of doing damage to portfolios.

It is not easy to research an asset class, country or individual stocks, or what may be suitable funds, when no-one else is interested. It is harder still to avoid those which everyone is talking about with great excitement. But 2018 provided examples of how it can help.

At the start of this year, the euphoria surrounding cryptocurrencies was all-pervasive. Bitcoin promptly lost 75% of its value.

By contrast, defensive equity sectors were widely viewed with scepticism at the start of the year, amid widespread optimism regarding what was termed as a synchronised global recovery. But, using the S&P Global 1200 index as a benchmark, healthcare and utilities turned out to be the best two performing super-sectors (out of 11). Financials and materials (miners), both expected to do well, did worst.

A quick look at 2018 may therefore help investors to spot value and dodge the traps that 2019 may offer.

DON'T LOOK BACK IN ANGER

First things first. This year has not been easy. None of the major asset classes as a whole – equities, bonds, commodities – generated positive total returns in local currency terms. The pound’s drop boosted the value of overseas earnings but apart from select areas such as technology it was hard to find winners in 2018.

That may make investors wonder whether we are still in a bull market at all. Further doubts creep in when they look at major stock markets: not one beat cash in local currency terms, though again a slide in sterling increased the value of overseas shareholdings.

Equity sector trends further question the bull market. As already noted, defensive sectors led the way as cyclicals lagged and even technology lost some of its shine in the second half, amid concerns over valuation, regulatory pressure, product cycles and whether growth forecasts could be met.

To cap it all, any investor who thought bonds would provide capital protection came unstuck. In local currency terms, only German government paper offered positive total returns and a dash for Europe’s ultimate haven asset hardly smacked of confidence. Tighter monetary policy and signs of wage inflation – plus fears over whether tariffs would nudge prices higher more generally – took their toll.

THE WAY AHEAD

Analysis of those performance statistics means this column currently sees the major asset classes like this as we head into 2019, using Sir John Templeton’s four phases as a framework.

Euphoria is a lot harder to find than it was a year ago. This in itself could be a good sign for investors, since good news stories seem to be relatively few and far between, at least using financial coverage from the mainstream press as a yardstick.

That said, US stocks – and still tech stocks and the FAANGS in particular – as well as growth and momentum styles are still popular.

By contrast, emerging markets – a consensus favourite in January 2018 – are out in the cold after the summer rout. The loss of faith in bitcoin is now tangible. Financial stocks are unloved after a horrid year and fat yields and low multiples of book value mean banks may pop up on ‘value’ screens – even if ‘value’ remains intriguingly out of favour.

But if investors are really looking for an area where pessimism may mean value is available, look no further than the UK, wracked as it is by the Brexit debate – although admittedly you could have said the same at this time last year, to no great effect. It will be interesting to see if the FTSE 100 confounds its doubters in 2019 and beyond whether a deal is struck with the EU or not.

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