Welcome to 2019. It’s that time of the year where our charming editors desperately implore us to dust off our crystal balls so that we can give investors some clue as to what we think might happen in the forthcoming year. I freely admit to an appalling track record, probably influenced by the fact that I alternate between the normal impulses of my character (optimistic, liberal, internationalist, everything will be OK) and of my age (post 50, it’s all going to hell in a handcart).
Facts on the ground currently suggests that the latter impulse might be more on the ball but the contrarian in me thinks that we’re all much too pessimistic about what might happen next. So, in sum, my sooth saying and runes reading skills are about as useful as a chocolate teapot!
What I’d rather map out are what I think are three possible scenarios for 2019, with attendant probability percentages. Now, before I get into this ball gazing, I have to issue the usual caveat. I see no real reason to do anything too heroic or strategic if you are a long term buy and hold investor with a time horizon of 20 to 40 years. Keep at it and adopt one of two strategies. The first is reduce costs and buy the market. More on this in two weeks’ time when I start my Lazy-ish Portfolio of index funds. The other strategy is to find an active fund manager (say James Anderson at Baillie Gifford or Nick Train) you rate, stick with them and forget the noise of markets.
That said, I would humbly suggest you keep a beady eye on a few ‘tectonic’ macro possibilities. Everyone is obsessed about populism at the moment and the consensus view is that globalisation is about to retreat. Maybe, but if it does, I’d worry that a war of some sort is the end result in what increasingly becomes a zero sum game of big power politics.
The more likely scenario I think is that globalisation might intensify helped along by technology. Here I’d point to the rise of big data, artificial intelligence and other grand sounding stuff. Its easy to laugh this all off but there is something really rather important happening out there and it will bring a storm of disruption at the global level.
At the political level I also think that even long term buy and hold types need to think long and hard about the prospect of a Corbyn government post Brexit. I say this as someone who sits on the accursed metropolitan media liberal left but the prospect of the hard left in power scares me witless – and it won’t end well. If it happens, and I’d put the probability above 40%, I’d suggest thinking long and hard about your exposure to sterling assets.
Lastly, the real long shot. Most rising asset prices have been premised on the concept of lower interest rates for longer. I still think the Federal Reserve will get US interest rates to 3.5% and then promptly lower them back to zero again – in the midst of a sharp slowdown/recession in 2020 – but it is a possibility that we could be returning to 'normal' interest rates, with long term rates above 4%. If that is the case, the investment implications are profound.
The 'new volatility regime'
Anyway, back to my putative scenarios for 2019, starting with the most likely in my estimation – at around a 40% probability. I call this the new volatility regime argument. Markets bump and down with some scary sell offs and some equally enthralling buying on the dips. Overall, markets drift sideways but we avoid any nasty sell offs of 25% to 40% or more. This scenario could repeat 2018, with a 4% loss for world stock markets. Or they could produce a 5% gain. Who knows!
In this environment, competent hedgies and long/short equity managers should be able to grind out decent return as might cautious dividend junkies, although finding said competent managers is no easy ask. In future columns I’ll examine the absolute returns fund sector in more detail (spoiler alert – its not rosy) as well as long short managers such as Sanditon but for now I’d suggest a really alternative idea, namely structured products which provide contractual returns of anything between 5% to 15% in these volatile markets. More on that controversial subject at the end of the month.
'Always Look on the Bright Side'
The next scenario is inspired by my Christmas reading – of the excellent Eric Idle biography. Let’s call this the ‘Always Look on the Bright Side’ scenario, which has a 35% probability. In sum, we’re all far too pessimistic and as one leading fixed income fund manager (for Pimco) observed to the Wall Street Journal last week 'remember that the ordinary working man or woman has more money in their pocket'.
Global growth may slow down a little bit but president Trump and Xi might (!) find a way through their troubles and we could even see an end to the first stage of the Brexit process. The catalyst for change could be Asian central banks pumping liquidity back into their systems (a development recently highlighted by hedge fund research house Cross Border Capital as the big move to watch out for in 2019). Investors might also decide that risk has been repriced back into equities and we could see a lesser spotted stock market 'melt up' – one last hurrah.
In this scenario I’d be looking to focus back on equities generally, and especially Asian equities, but not including China – more on this in my column next week where I highlight a great value manager who has just reopened his very popular fund to new investments.
'Hell in a handcart'
My last scenario is inspired by much older relatives who over Christmas suggested that 'David, everything really is going to hell in a handcart', immediately followed by the consumption of a swift glass of port and three mince pies whilst watching Doc Martin.
I’m sure all of us can work out what could go badly wrong in this scenario involving Trump and President Xi, North Korea or Brexit but for me the key signal might come with the end of dollar supremacy. Trump could fire the US Federal Reserve boss and blow a large raspberry at the global holders of US sovereign debt.
The dollar could start to weaken, and we could see gold prices – which are already on the move – break consistently past $1,250 and then $1300 an ounce. I put the probability of this happening in 2019 at less than 20% but if it does, I’d suggest that gold funds are worth watching as are strategic bond fund managers with a heavy focus on sovereign fixed income securities.
Readers might be feeling a little disgruntled at this point. 'To hell with all this prevaricating probability nonsense David – give us your top tips!'. Which is to be fair what my esteemed editor also hinted at. I am as always, more than a tad cagey but I would highlight three particular ideas. The first is that UK equities look criminally cheap to me, provided we don’t have some Brexit meltdown or Corbyn is elected. In this scenario a good old-fashioned UK focused all caps manager could power ahead.
In terms of sectors I think insurance is worth looking at again. The big reinsurers in particular are struggling with global warming and the changes to pricing models whereas the mainstream insurers are now fighting financial disruption as fintech start ups start to reprice risk. But opportunities within this sector are legion for the right active fund manager.
Lastly, I think that healthcare is still the elephant in the room – one that is constantly increasing in efficiency and cost. The biotech boom is a decades long phenomenon which will have its ups and downs but is a huge opportunity. In particular I also like funds focused on investing in businesses that are developing new technologies and products that help reduce costs in bloated, inefficient national health systems.
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