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Investor Insight - Winter 2018/19

  • Quarterly investor insight
  • 10 minute read

By Nancy Curtin

We anticipate that 2019 could be a better year for equity markets. We think that many of the growth and liquidity challenges of last year have been discounted in share price valuations, after the significant declines in the fourth quarter of 2018. Our view is that markets are poised to have a better year in 2019, an outlook based on a number of assumptions which we will continue to test and validate throughout the year.

  • While economic growth will continue to be a concern, particularly in the first half of the year, greater accommodation from Central Banks globally should temper the slowdown, and provide liquidity to the financial system.
  • The policy challenges of 2018 (such as US-Chinese trade disputes) are likely to find a resolution. Removal of these uncertainties, many of which seem to be moving in the right direction already, could be a positive for financial assets.
  • We see a narrowing in the differential between growth in the US (strong growth in 2018) and the rest of the world (on a decelerating trend). This should provide further support for markets outside the US and some stabilisation of the US dollar, good for assets outside the US.
  • Given the decline in stock markets last year, valuations are supportive with price earnings (P/E) multiples around 5-10% below 10 year averages. We expect modest assumptions around earnings growth and dividend yield to be enough to support share prices; attractive valuations mean that markets are unlikely to de-rate further from here.
  • Volatility will remain a feature of financial markets. The environment of increased volatility is not an aberration but rather a return to long-term market norms. However, large dispersion in share price returns provides a good environment for active investors, underpinning our ability to add incremental returns from security selection.
  • Finally, while risks remain in credit markets and in the durability of this economic cycle, we think these risks are likely to remain contained in 2019.
    • There are excesses in certain credit markets and levels of debt globally, but inflation expectations and therefore interest rates are still low.
    • We believe the recent slowdown will be seen as another mid-cycle pause, (we have had four already this cycle) and not the beginnings of a more sustained downturn.
    • We do not see the indicators typically associated with end-of-cycle conditions and hence think there is a low probability of a recession in 2019.

The more positive tone we see in markets as we begin 2019 is reflective of investors becoming more comfortable with the factors highlighted above. However, while we expect the year to end on a positive note, economic and policy decisions, and thus markets, will not move in a straight line. 2019 will have its share of upward and downward moves and we will continue to use our research to identify high quality, resilient investments which we feel will either add to return and/or reduce the experience of volatility in client portfolios. We favour the concept of a barbell approach: exposure to investments that will drive capital growth and total return, balanced with assets that provide some ballast to portfolios against the turbulence in markets due to volatile news flow and financial data.

Read the full Investor Insight

 

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