2018 Review / 2019 Prospects

Analysis | February 26 2019

Catherine Wajsman answers a series of questions aimed at understanding market trends in 2018 and, where possible, trends for 2019

1. What happened on financial markets at the end of the year?

A brief ‘tsunami’ was seen on stock markets in Q4 2018, as predicted.

In late September, most international portfolios stood at +5 to +15% (a rise in returns boosted by investments made on American markets). By the end of the year, the same portfolios recorded negative returns (-0 to -15%) (with the worst results seen in portfolios invested in European mid- and small-caps or on certain Asian markets, including China).

Without going into detail, at the international level, a record-setting $84 billion was withdrawn from equity funds in the last six weeks of 2018 – a figure higher than that seen in the same period in 2008!


2. Should we expect an economic recession? In other words, will this be a major risk in 2019?

Our answer is NO. Not in 2019, in any case. A distinction must be made between recession and economic slowdown. I would say – and thankfully so – that in general, we spend more time anticipating recessions than actually going through any.

For us, the primary indicators that a recession will not occur in the U.S. in 2019 are: low unemployment rates in the U.S., a boom in housing starts, and a tax system that is favourable to company profits. In Europe, external factors have already slowed growth, such as strikes, the “yellow vest” movement in France, changes in international standards in the automotive industry, a general climate of political uncertainty, a banking crisis in Italy and Brexit.

Coming back to the subject of recession – or the lack thereof. If I were to forecast 2019, I would bank on 2.5% growth in the U.S., 1.5-1.8% growth in Europe, and around 3% at the global level, given the significant gap between major emerging countries like China, India, Brazil and Russia on the one hand, and smaller countries, on the other. We shall see at the end of 2019 whether this forecast is reliable.


3. You exclude the possibility of a recession this year. What are the most serious political risks and dangers, in your opinion?

On one hand, it would be best if the protectionist policies of the President of the Unites States did not become aimed at Europe. Similarly, a sharp drop in liquidities, a steep increase in volatility and the extent of world debt at the moment, are, in my opinion, the most serious risks. Importantly, the Fed is currently withdrawing $50 billion in liquidity every month; the same amount it injected into the economy in the era of quantitative easing.

A liquidity-starved market can be worrisome when it ‘freezes’. This is often the result of excessive corporate debt. We observe that when a company’s results fall short of expectations, share value tumbles 10 to 15%, which is obviously the source of volatility we’ve seen on markets. Ultimately, managers dislike both lacklustre markets and excessive volatility.


4. Over the last few quarters, you mentioned that you have turned to alternative products, which could be defined broadly as any product other than traditional shares and bonds.

Yes, we are very pleased to have stepped up our investments in alternative products for over two years now.

Among these, listed and unlisted debt products – not to be confused with traditional bonds, which, in our opinion, hold little potential in the event of an interest rate hike – are without a doubt an interesting option for investors, provided they are compatible with their investor profile across the board, from the least to the highest level of risk.

We often move away from traditional high-yield products (high rates agreed by a company) in favour of underlying real-estate products with guarantees and securities.


5. Difficult question: what do you forecast for 2019 and what is your advice?

First and foremost, in terms of forecasting, opinions should be most humble. If you look at the forecasts and advice from most analysts and managers in early 2018, you will find – with the exception of a few recommendations for caution – a near euphoric forecast in terms of European share prospects and a near total rejection of the American market. We saw the outcome!

Today, the question is: did the most recent market correction go too far? If uncertainty surrounding Brexit improves, and concern over trade conflict between the U.S. and China can lift, markets can spring back. Why?

  • because they fell too hard,
  • because they are volatile,
  • because certain companies are seriously undervalued,
  • and because the first rate hike expected in Europe in 2019 will now occur – at best – in 2020.

But, as I said earlier, we do not believe that European markets will exceed their highest 2018 levels. That said, experts often express surprise at the gap between company profits and declining markets. There is no correlation, at least where “timing” is concerned. If we look at the recent past, markets anticipated profit growth, year after year, bolstered by historically-low interest rates. It was clear that this increase would stop one day. No one could predict when, exactly. The slowdown in growth made profit goals too ambitious.

Certain managers were not invested and missed out on the final growth phases, while others – like us – divested on a tranche-by-tranche basis, and others took a ‘grin and bear it’ position and waited for markets to bounce back.

In terms of investments:

  • we trust managers that are specialised in a given asset category, who have proven themselves in that speciality, and who give preference, directly or via an intermediary, to health, tech and biotech funds.
  • We confirm our distance from index funds.
  • Despite exercising caution on equity markets, we continue to invest on a permanent basis in American shares. Regardless of short/medium/long-term circumstances, the potential for growth and rebound in the U.S. is limitless.
  • Rightly or wrongly, we are under-invested in European markets, though we have held onto a few small and mid funds. We also engage in stock picking and follow a select amount of major, premium stock.
  • We have made a symbolic foray into emerging market debt, which offers attractive returns, particularly due to an undervaluation of certain emerging currencies.
  • Lastly, we are increasing portfolio share in alternative products – structured products, real estate, and other opportunities – which have the potential to generate satisfying revenue (with an annual target of 5 to 8%).

We are certain that this type of investment will develop further and be a substantial source of comfortable fortunes in the years to come.