All of these factors, he said, resulted in the worst year since 2008 for share markets.

“The fragilities underlying the prolonged strong returns of the past few years became more apparent in the final quarter of 2018,” he said.

Looking at 2019, Dr McCaw said that asset prices that are high are likely to produce low returns in the future.

“While there are some exceptions, [such as] emerging market shares, our assessment is that asset prices are mostly not cheap and, in some cases, [as with] US shares and nominal bonds, are still high,” he said.

“However, the path of returns will depend on how investor expectations change. A trade deal between the US and China that is favourable for economic growth is still possible. The argument over the Mexico border wall can be resolved. We also know that the US Federal Reserve (Fed) is data dependent and that US economic growth is still robust.”

Liquidity, however, continues to turn into a headwind, he warned.

“The rise in share market volatility is a reminder of vulnerabilities that have accumulated in the financial system. We also know that the Fed understands the imperative to build policy options for the next economic downturn,” he explained.

“Indeed, the Fed, under the leadership of Jerome Powell, has partly removed the lower for longer bias that distorted the outlook for US interest rates. This is a very important change for all risk asset markets. The presumption of interest rates remaining lower for longer has been a core driver of stretched valuations across asset classes.”

Even small movements in long-term interest rates can have a profound effect on the valuation of all assets, he cautioned.

“Share prices, for example, can move significantly if the market revises their cost of capital assumption. Further interest rate rises by central banks would likely drive the markets’ perception of the ‘natural’ interest rate higher again,” he said.

While investors may be rewarded for taking on risk over the coming year, he said, this could prove unwise where they ignore “elevated share valuations and global political risks”.

“We believe that focusing tightly on risk control while taking opportunities when they present themselves will be beneficial. This is a challenging period that will test all investors,” he said.