WHEN stock markets sell off rapidly it is easy for investors to be sucked into trading because anxiety kicks in and a fear of further losses can drive behaviour.

Most people have a bias for action and feel they should be doing something if others seem to be selling, but stock market turmoil creates a lot of false signals. That is why it is important to focus on the big picture.

Global growth will slow in the coming year, but recession in the world economy remains unlikely. In the UK, real wage growth is helpful, but likely to remain subdued. Although wages are currently outstripping inflation, factors such as the weak pound are likely to make the Bank of England cautious about any rise in interest rates in the next 12 months.

What can look like new trends are sometimes quickly reversed. For much of 2018, oil looked the place to be, but the sector has sold off almost as sharply as other cyclicals. After the summer, a market change that initially looked like a rotation by investors from favouring growth businesses to lower-priced ‘value’ investments has become more complex. In fact, many of those apparently cheaper companies face challenges or are more exposed to the economic cycle. More recently, investors have turned to defensive businesses such as those producing essential consumer products, but these but might not all prove safe in 2019. Many face disruption and a new wave of younger consumers who have much less respect for older brands.

The theme for the year may not be trade wars, commodities or geopolitics, but debt. Heavily borrowed companies will find it harder to raise money from shareholders and bank finance will tighten. Investors will need to look harder at accounts to identify true cash generation.

Clues to this are in the ways in which stated profits are adjusted by management, and in the comments made by auditors in the annual report. Companies can present impressive numbers that they claim represent underlying business progress and inherent profit, but are actually audited as losses.

Some smaller companies could see distressed refinancings and larger ones might be forced to cut dividends if their cash is squeezed. Inflation is unlikely to pick up enough to bail out businesses with strategic weakness, or those that do not generate cash.

As 2019 progresses, the UK stock market might be better placed than some others. Shunned by international investors and with outflows since the Brexit referendum, it looks under-owned. Sentiment has driven domestically focused shares and the pound itself down to low levels.

As an economy with leadership in a number of sectors, an independent monetary policy and a relatively free regime on takeovers, its appeal may be rediscovered when there is more clarity on Brexit. Market moves now are more extreme as regulation has squeezed out some of the buffers that used to cushion moves. Takeover bids are often the first signal that there are bargains in the stock market.

Investors should think in terms of the major longer-term trends rather than simply whether recession lies ahead. The US economy remains strong, with more risk of recession in Germany. It is likely that the trade frictions between the US and China represent the start of a long-term fight for technological leadership, fair terms of trade and security of supply chain, rather than being simply about tariffs.

UK real wage inflation should help to insulate some consumer businesses. Global disinflationary pressures remain, challenging many traditional businesses, including consumer brands.

Despite the challenges for technology and e-commerce, the disruption in retail and financial sectors will continue in 2019. Investors need to look for genuine growth businesses, industrials that have fallen to distress prices, or consumer businesses with solid dividend records.

Colin McLean is managing director of SVM Asset Management.