2019 what lies ahead?

Key recent developments more positive for 2019

A few factors have calmed nerves delivering a strong start to 2019:-

a) A drop in US Treasury yields along the yield curve

Source: www.bloomberg.com

The sharp drop across the yield curve in the last month shows a repricing of short-term expectations of the path of US interest rates in 2019. The Federal Reserve has stressed it will remain “patient” and data dependent which investors have interpreted as pausing on its previous guidance of two rate hikes over 2019.

During December investors rightly concluded that the hike to Federal funds and “autopilot” balance sheet reduction amounted to the central bank applying brakes to the economy. “Quantitative tightening” (“QT”) ($50bn of asset sales per month) has the potential to increase yields. For the moment worries about QT have abated, but this is a moving part for 2019.

b) Strong US economy as evidenced by payroll data and wage growth (+3.2%). The December data (+312k v 184k) with November and December revised up by 58k helped dispel worries about a sharp US slowdown in 2019.

c) Improving sentiment around the ongoing US/ China trade talks (7th-9th January) has featured in the January optimism with the negotiations being given a 90 day breathing space after the recent escalation. The Chinese leadership has prudently prepared the public for a protracted negotiation which if relieved early could provide a boost.

d) Low valuations, low expectations. 2019 has an advantage over 2018 in this respect. More on this later.

A brief post mortem on 2018:-

a) Global equities were expensive at the start of 2018 and spent 8 months repricing. 2018 demonstrated the length and pace of a repricing phase at least insofar as MSCI World ex US ( 8 months/ with UK/ EU index losses (UK)-12% (Eurostoxx 50)-14% below Tokyo -15% and Shanghai (-21.6%). US markets again outperformed with a -6% return.

b) The FAANG (Facebook, Apple, Amazon, Netflix, Google) bubble? Yes and No. Apple Inc where concerns over iPhone pricing/ volume growth proved justified. Apple’s annual return of -10.7% puts into context the market cap reduction of c. $405bn from its peak of $1.1trn. Microsoft was up 19.2% over 2018, Google up 2.5%. Overall the FAANGs proved resilient to 2018.

c) Weak crude oil – recent promises of 1.2m barrels/ day production cuts failed to move crude oil, the glut in crude is a continuing issue in 2019.

d) Rising global interest rates – markets were sensitive to US rate hikes with a major byproduct, the flat yield curve impacting banking margins.

How correlated are UK/EU equities?

The magnitude of the drop in UK/ EU valuations over 2018 is relatively uniform with high downside correlation across all indices.
The data suggests that the 2018 UK/EU index declines did not vary much due to special factors for example Brexit and the Paris protests over December.

Source: WSJ 11th January 2019

Key factors for 2019

Subscribe to our Award-winning Newsletter

We provide daily market data in the form of our award-winning newsletter, The Morning Call and The Market Close.
You can subscribe to this information at any time to help you make the most of your investment.

Quick Sign-up

Important Information

Key to Material Interests:

Please be aware that the following disclosures of Material Interests are relevant to this research note:

N/A

  1. The analyst has a personal holding in the securities issued by the company or of derivatives linked to the price of the company’s securities.
  2. Collins Sarri Statham Investments Ltd has clients who hold either shares or CFD positions in this security.

Analyst Certification:

The report’s author certifies that this research report accurately states his personal views about the subject securities, which is reflected in the ratings as well as the substance of the reports.

Recommendations:

Collins Sarri Statham Investments Ltd (CSS) does not in any of its publications take into account any particular recipient's investment objectives, financial situation, and specific needs and demands. Therefore, all CSS publications are, unless otherwise specifically stated, intended for informational and/or marketing purposes only.CSS shall not be responsible for any loss arising from any investment based on a perceived recommendation.

No publication (including recommendations) shall be construed as a representation or warranty that the recipient will profit, nor avoid sustaining losses, from trading in accordance with a trading strategy set forth in a publication.

This research is non-independent and is classified as a Marketing Communication under FCA rules detailed in their Conduct of Business Rulebook (COBS). As such it has not been prepared in accordance with legal requirements designed to promote independence of investment research and it is not subject to the prohibition of dealing ahead of the dissemination of investment research outlined in COBS 12.2.18.

Risk Warning:

Trading in the products and services offered by Collins Sarri Statham Investments Ltd (CSS) may, result in losses as well as profits as the value of investments may go down as well as up. You may not get back the full amount you have invested. Any reference to past performance should not be viewed as an indication of any future performance. Investments held in overseas markets are subject to the effects of changes in exchange rates which will impact on the value of the underlying investment. Investments made in AIM and penny shares carry an increased risk due to the difficulty in creating a market in these shares. There may be a substantial difference in the buy and sell price. Leveraged products such as Contracts for Difference (CFDs), derivatives, commodities & Foreign Exchange (FX), carry a higher risk to your capital. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider (Saxo Bank). You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money. Losses can exceed deposits on some products.

Speculative Trading is not Suitable for all Investors

The information contained herein is based on materials and sources that we believe to be reliable however we make no representation or warranty, either express or implied, in relation to the accuracy, completeness or reliability of the information contained herein. Please note that the figures shown may, in some instances, be rounded to the nearest penny. Prices can move sharply from those quoted in this document. Current prices can be verified by calling one of our brokers. CSS is under no obligation to update the information contained herein. Neither CSS, nor its affiliates, nor its employees shall have any liability whatsoever for any indirect or consequential loss or damage arising from the use of this document.

Get Started with CSS

Open an Account

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider (Saxo Bank). You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

Subscribe to our award winning daily newsletter

Voted "Best Market Newsletter" in 2012, 2014, 2015 and 2017 by the City of London Wealth Management Awards

Subscribe to our newsletter (Popup)

By signing up to our free email, you are consenting to receive these promotions. The newsletter is sent up to three time per day during the week and up to once per day over the weekend. The newsletter contains company news, market movements, CSS research and promotions and breaking economic news. Occasionally our newsletter will contain advertisements from trusted partners. However, we will never give, sell or rent your email address to any other companies. If you want to stop receiving our free emails you can unsubscribe at any time by clicking on the link at the bottom of each email. You can read our privacy policy here.

Sending
No, thank you