Investing for 2019
A new year is fast approaching, now is the time to take stock of the year gone and to look to the year ahead. The current angst in the market is almost palpable as political pressures mount and uncertainty rises. Some investors are on edge, but I’m surprisingly calm as I see 2019 coming with cause for (cautious) optimism. Uncertainty creates opportunity, and profits to be made, but when the clouds clear, as they inevitability do, confidence will return. It’s been a long bull run so far but that doesn’t mean the end has to be near. Even if the inevitable recession strikes, it may be a more of win than you realise.
How did the 2018 forecast perform?
The 2018 forecast was a great success with core predictions coming true as the year progressed. Key messages from 2018 were the impact of leverage, rates and economic expansion on households, and the return of volatility as the economy restructures.
2018 forecasts and results
- Volatility returned
- The housing market turned
- The Labour market remained strong and as highlighted would have minimal impact on wages due to the stage in the cycle
- Falling retail spending; the fall in retail foot traffic and spending is apparent with the events of major retailers like Sears, Toys R Us, Myer etc.
- Political uncertainty remained (basically everyone called this)
- The top bet was on firms that focused on business investment and B2B sales, in particular services to business. These firms proved to be the October earnings winners and provided excellent returns to shareholders.
Inflation and the realignment from fossil fuels to renewable energy didn’t exactly pan out as anticipated. However, I still expect that inflation will remain historically subdued until either trade constraints cause it to lift, or the internets competitive landscape is recognised and inflation calculations adjusted. I also continue to support that technology such as solar, renewable energy and hydrogen cars will be profitable and growth engines of the future but consumer access to these products still needs to improve.
Overall, the 2018 outlook was strong, as highlighted themes eventuated and came to light. We can only hope that 2019’s outlook will prove to be equally successful.
2019 in Dot Point
- The risk/reward rebalancing continues as QE distortions clear from markets, volatility remains
- Inflation to rise modestly amid pressure from trade, and wage growth
- Wage growth to start as the full employment forces firms to compete for labour
- A fiscal bull run or recession both create positive outcomes, the year ends with markets up, as the uncertainty surrounding ‘late cycle’ dissipates with either of these events. (One of them has to happen, it won’t be a full year of nail biting)
- A defensive portfolio with targeted key opportunities is the way to be positioned for 2019, until it becomes clear that a bull run or a recession is occurring
The Global Outlook
Opening a newspaper has been a sorry affair for a while. The frustrating machinations of the current political environment(circus) are enough to make anyone throw in the towel. But that is something we can’t afford to do. The power of the vote and the elected official has a significant impact on how 2019 plays out. In the future we need to get as many people to use the right and privilege that their ancestors gave their lives to obtain. Millennials need to stop standing idly by, and baby boomers need to vote for a future for their children. It’s time that the voter made the politician accountable and fought for a better future.
The 2019 outlook hinges on the decisions of leaders elected on the votes of often extreme political view points. Trade wars, environmental policy, international negotiations, immigration, infrastructure, and monetary policy are all at play in 2019 and we need pragmatism not extremism.
Despite the political characters at large, the forecast for 2019 is largely a positive one. If a recession is to occur in the two thirds of the year then that is a good outcome. A recession has largely been priced into the market already and it’s arrival will put a rest to any concerns or fears. The arrival of a recession in that window will clear any underlying excesses swiftly and economic growth will no doubt be tremendous. The most likely sparks for a recession will be international policy that cause business to restructure. The restructure will create the short term pain of a recession but put in place the prospects for long term growth that will be no doubt supported by fiscal stimulus. The alternative start to a recession would be the collapse of a major retailer. Either way, the economy is positioned for a historically normal recession and a healthy growth spurt to follow.
A possible counter is that trade negotiations between the US and China are successful, budget surpluses create big infrastructure projects, and Britain pulls a rabbit out of a hat that begin global trade negotiations and a bull run ensues. Less probable, but not impossible.
Either way the final outcome for the year is a win. 2019 will end on a positive however, expect some bloodshed as the year unfolds.
Emerging markets may present an excellent opportunity in the upcoming year. They have received little love of late and are home to significant growth engines. The only major risk are rising rates. I believe that this will actually be largely mitigated by international competition and an out of sync global economy. The disjunctures between national economic performance will work in the emerging markets favour.
Sovereign debt is always an issue with emerging markets but it is also an opportunity. Rising rates in America and currency fluctuations may present excellent moments to buy in at low prices. Buying into the emerging markets during 2019 may prove to be a prescient move for longer term 5–10 year growth.
In The Spotlight: Consumer Technology
Consumer technology is at the forefront of global and domestic opportunity. At the recent Sohn Hearts and Minds Investment Conference global fund managers largely selected stocks that capitalise on consumer online spending in Asia and the leverage of new technologies like 5G, blockchain etc. to facilitate this.
Consumer technology is where the growth stocks will be in 2019. Consumer behaviour is pushing towards online more and more with events like Cyber Monday and online only sales. The rapidly growing markets of China and India are huge for online retailers. Either the retailers themselves or more importantly providers or consumer driven technology solutions will be big winners in 2019. It is not only the retailers but the creators of the technology that underpins the new retail experience that will win big.
In the Spotlight: Financial Services
Financial services are experiencing a competitive renaissance. Providers like AfterPay are at the front of consumer technology and facilitating the new way of doing business.
Cyber security provides and financial technology are at the centre of disrupting the retail model and the financial services industry. These businesses are key to future growth, the only challenge is which to select. Personally I’d lean towards a small basket of FinTech and Digital Security firms rather than picking any individual stock. The financial services industry is in the spotlight for 2019 due to not only the growth of FinTech and it’s impact on traditional banks but also due to the performance of the traditional banks themselves.
I’m sure the irony of 2019 being the year of the Pig will noticed by Australian Bankers as the Royal Commission releases it’s final report on FEB 1, 2019. This mismanagement of piggy banks and other investment products was splashed across news headlines across the world. The previously praised and robust banks of Australia had all their dirty laundry aired publicly and their shameful conduct was finally revealed. Elsewhere, Warren Buffet was steadily adding ever more American Financiers to his bulging portfolio. Huge bets on JP Morgan and Bank of America Merrill Lynch now sit alongside Wells Fargo, American Express, U.S. Bancorp, Goldman Sachs, Bank of New York Mellon, VISA and MasterCard.
So the question is, are financiers a good or bad bet in 2019?
I think it’s time to be selective. The financiers and banks will be embarking on period of subdued growth, however there are businesses with excellent management that will create opportunity and deliver high performance. The period of homogenous high returns in the industry is over. It is now the time of differentiation and selected performance.
Overall, feel good about the year ahead. The ride could be a little bumpy at times and incredibly nerve wracking or exciting but hopefully it will turn out to be a good one. If history is anything to go by then a return to normal should involve a brief recession and then tremendous growth.
For some reason the words of Robert Frost seem fitting in the current climate and looking at 2019. Mull it over if you like, otherwise go out and look to grow that portfolio.
The woods are lovely, dark and deep.
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
If you have any questions then please feel free to comment, and if there is anything you’d like to see analysis on or read about in the future then let me know.
Also, please note that this article does not represent financial advice, or the views of any organisation; it is only the opinion and analysis of the writer.
Thank you for reading.