European video outlook: investor positioning will matter in 2019

11/12/2018

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What are the key themes likely to shape markets in 2019?
 
I do think with markets and indeed stocks, I love how we feel the need to find a narrative to justify a move. I think 2018, as it comes to an end, is a really good example of that. As people look into 2019 it is all about trade wars, Trump and Italy and Brexit. But actually, I don’t think it is about that at all. I think these are convenient hooks and narratives. Far too much ink is wasted writing about that sort of stuff.
 
I think recession is what markets are sniffing – probably not recession everywhere, of course, but I think there are some odds-on favourites for going into recession. Italy is probably among those, as far as Europe is concerned. But I think there is a good chance of an industrial recession in America. There is a very good chance of a profits recession just about everywhere. So you don’t need GDP recession validation. But stock price moves in the second half of 2018 are telling you: margins / profits are going into recession across a wide expanse of the market. That, for me, spells opportunity. 
 
What are the opportunities and risks within your asset class?
 
In opportunity terms, I would look to two things. Bargains are found in recession. We need a recession to bring us the bargains. If I look at some parts of Europe, and how it has behaved in stock market terms: industrials, manufacturing businesses, autos, auto components, you are going to get bargains. You might already be getting those bargains now, but you are going to get them in 2019. European equities, as far as I am concerned, have already voted for recession. They are telling you there is a recession. Now if it is avoided, I think it is going to be quite interesting upside. Even if we go into recession, I think 2019 is going to present terrific buying opportunities for a stock picker in Europe. As far as the second opportunity: I don’t think the world remembers European equities outperforming US equities. I think it is coming.
 
Risks – everywhere. It is always where you are not looking. On Brexit and Italy; everyone is a Brexit expert, everyone is an Italy expert. Everyone is a Trump trade war/China expert. But nobody is. I will tell you where I think the single biggest risk is. I have been such a bore, because I have been wrong for the last couple of years and now it is starting to come right: growth / momentum stocks. True growth stocks are probably fine. But a lot of stocks were masquerading as growth stocks. Investor positioning is an enormous risk – for those investors.
 
The lead market globally, is US equities. If I am right that they still have very substantial downside risk, then I find it very hard to believe that other markets are going to have very substantial upside. I think the poor cousin – European equities – probably outperforms US equities in the year ahead – by going down a lot less.
 
How have your experiences in 2018 shifted your outlook for 2019
 
There has been absolutely no shift in approach. I feel as though there is some sort of validation for those of us who were perhaps a bit castigated. You know what it is like in this business: two bad years and it is confirmation of pariah status. The industry has gone nuts, as far as I am concerned, on short-termism. But anyway, we are seeing validation that valuation does actually matter. I love all this ‘valuation doesn’t matter’ … valuation doesn’t matter until it matters. This year was a reminder that it matters. It is only the beginning of that reminder, as far as I am concerned, for popular areas such as US equities and tech in particular.
 
So we are getting a reminder that investor positioning does matter; investor crowding does matter. Being aware of a benchmark index matters again – not just jumping into any old mid-cap momentum, or small-cap momentum stock. That is getting found out. Growth stocks: true growth stocks – are fine. Non ‘true’ growth stocks – are getting found out. Momentum investing is getting found out. So nothing has actually shifted my outlook. It has just made me a lot happier at the end of this year than I have been at the end of the prior two years, because valuation, balance sheets, cash flow… all of these really quaint old-fashioned things, are not quaint and old fashioned. They are real, and investors are being reminded of that.

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