Our 2019 Market Outlook
15 January 2019
Navigating the Year Ahead
We think the current sell-off is the market resetting to slowing economic growth and lower overall earnings expectations globally, while taking into account major market risks such as a US/China trade war, sharply higher interest rates, and other geopolitical concerns such as Brexit. The market has adjusted stock valuations lower to account for market risks. The question is how much has been reflected in current prices?
At the current juncture, we do not foresee a catalyst for a large market crash, although volatility is likely to remain elevated in our view, until at least the middle of the year when there is likely to be better clarity around several of the uncertainties facing markets discussed above.
In the immediate future, we see the current US corporate earnings season (which kicks-off this week) as
very interesting given weak guidance from several notable companies such as Apple (on the back of weak
Chinese demand) and Macy’s.
With the above in mind, we are watching 3 key areas in 2019 which we believe will drive markets: the
extent of the Global Growth slow-down, Political Uncertainty, and Interest Rates moves as global Central banks unwind stimulatory measures.
Similar to 2018, this year could be a difficult one for investors to navigate. Investment opportunities no
doubt still exist against the backdrop described above and the risks above are now being factored into
share prices to some extent, but investors need to be more selective.
Overall, we think medium-term investors should not panic in times such as these, and remain focussed
on opportunities to buy quality companies at attractive valuations. However, given the uncertainties we believe it is prudent to allocate a portion of the portfolio to cash in order to protect against down-side moves.
Volatility has returned to markets in a big way since the last quarter of 2018, and we
are clearly in the latter stages of what has been a long bull market since the 2008/2009
financial crisis.
We think the current sell-off is the market resetting to slowing economic growth and
lower overall earnings expectations globally, while taking into account major market
risks such as a US/China trade war, sharply higher interest rates, and other geopolitical
concerns such as Brexit. The market has adjusted stock valuations lower to account
for market risks. The question is how much has been reflected in current prices?
At the current juncture, we do not foresee a catalyst for a large market crash,
although volatility is likely to remain elevated in our view, until at least the middle
of the year when there is likely to be better clarity around several of the uncertainties
facing markets discussed above.
In the immediate future, we see the current US corporate earnings season (which
kicks-off this week) as very interesting given weak guidance from several notable
companies such as Apple (on the back of weak Chinese demand) and Macy’s.
With the above in mind, we are watching 3 key areas in 2019 which we believe will
drive markets:
1) the extent of the Global Growth slow-down
2) Political Uncertainty, and
3) Interest Rates moves as global Central banks unwind stimulatory measures.
1) Economic Growth
Heading into 2018, one subject on the mind of many equity investors was whether the
synchronised growth story that has played out for the last few years would continue
to extend the longest ‘bull run’ on record, or whether we would start to see cracks
appear in equity markets as we headed towards the later stages of the current market
cycle. A sharp slowdown in growth is a clear risk for markets.
China has said it plans to set a lower economic growth target of 6-6.5 percent in 2019,
adding to the prospect of an intensified tariff war between the US and China, and there
is potential for the US economy to slow as the fiscal boost from Trump’s tax cuts fades
away. The World Bank is predicting global growth will slow this year due to headwinds
that include tightening financing conditions, moderating industrial production and
intensifying trade tensions.
Economic growth moves flow through to company earnings, and Goldman Sachs have
forecast 2019 US earnings growth could be as low as just 3 percent because of slowing
economic growth, a strong dollar and low oil prices. Earnings had been a clear positive
factor for driving the bull market, and we will be watching the current earnings season
closely.
2) Political Uncertainty
Global politics unfortunately will likely continue to play a part on driving markets this
year. We see risks from a full-blown US/China trade war, although recently there have
also been positive signs last week around ongoing trade talks with growing market
optimism that the US and China can reach a trade deal before a March deadline. Other
potential political risks include a fallout from Brexit/political stability concerns in
Europe as populism continues to be a global theme.
3) Interest Rates
Last but certainly not least, the impact of higher US interest rates and tighter financial
conditions has been a theme through 2018 and will continue to be important to watch
in 2019.
Jerome Powell has had a bumpy first year as Federal Reserve chairman when it came
to talking policy, giving increasingly mixed signals and President Donald Trump stepped
up his attacks on the US central bank. In saying that, sentiment looks to have improved
in January as US Federal Reserve Chairman Jerome Powell reiterated the US central
bank can be “patient” on raising interest rates further.
However, the other huge factor at play is the reversal of Quantitative Easing measures
that were a significant tailwind for markets by the US Fed, the European Central Bank
and the Bank of Japan. It will be interesting to see how market prices react to this (as
the Central Banks taper bond purchases), and an unknown is the extent to which the
effect on bonds will overwhelm the normal interest rate cycle (which could push up
borrowing costs).
Similar to 2018, this year could be a difficult one for investors to navigate. Investment
opportunities no doubt still exist against the backdrop described above and the risks
above are now being factored into share prices to some extent, but investors need
to be more selective.
Overall, we think medium-term investors should not panic in times such as these,
and remain focussed on opportunities to buy quality companies at attractive
valuations. However, given the uncertainties we believe it is prudent to allocate a
portion of the portfolio to cash in order to protect against down-side moves.
