A world of opportunity?

Please note the disclaimer at the end of this Blog.

2018 has proved to be a frustrating year for equity investors, with fluctuations between gains and losses and, by the end of November, only the US amongst the major markets showed a positive result in sterling terms. After two years of very strong equity returns (the FTSE World equity index returned over 46% over 2017-8) perhaps this should have been less of a surprise than it proved, as 2018’s lack of direction has allowed earnings growth to catch up with the anticipatory optimism suffusing equity markets towards the end of 2017.

Economic growth has been positive, albeit somewhat lacklustre outside the US. Corporate earnings and dividends have increased, again particularly in the US where tax cuts were an additional propulsive force, so equity earnings valuations are lower than at the end of 2017. Nonetheless, there have been several factors leading investors to fear an end to the good times, resulting in sharp sell-offs in January and October, sandwiching positive returns in the middle quarters of the year, adding up to small falls overall (save for the US which was still ahead). The main worries have been:

  • Central Banks (particularly the US Federal Reserve) have been raising interest rates. Although rates remain low, global liquidity has become less loose and company financing costs have risen.
  • A dispute between the US and Iran led to fears of an oil shortage and significantly higher oil prices during the summer, presenting a drag on economic growth for consuming nations.
  • The US has also sought to renegotiate existing trading agreements with China and other major economies, leading to fears of disruption to trade flows and higher inflation.
  • Within Europe, Italy’s wish to loosen fiscal policy has met resistance from other EU partners, with the resulting rise in Italian interest rates weighing upon economic growth and the policy disagreement fuelling fears of a divisive European election campaign in spring 2019.
  • The Brexit negotiation process has failed to inspire or reassure.

It is, of course, in the nature of markets to look beyond the obvious for the opportunities or pitfalls to come. Rather as an antelope in the African savannah canters in the direction of distant rain long before the deluge, it is investors’ habit to look for a cloud behind every silver lining, as well as for blessings in disguise.

Although there has been no shortage of potential clouds this year, developments in recent weeks have been encouraging on several fronts. Oil prices have fallen sharply, as new supplies reached the market and the US softened its Iranian sanctions regime – good for consumers and companies with high energy costs. The US Federal Reserve indicated that its pace of rate rises was dependent upon growth in the economy and could slow, reducing fears of over-tightening. The US reached an accord with Mexico and Canada and has entered talks (after months of negotiation by foghorn) with China, alleviating concerns that growth could evaporate in the heat of a trade war. Brexit remains an inscrutable process but UK equities and the currency have already priced in considerable uncertainty, so there is the possibility of positive as well as negative surprises.

The known unknowns argue for a selective approach but improving news and valuations, together with the negative consensus that prevailed at the time of writing, suggest that opportunities exist for contrarian investors. Both hysterical volatility and euphoria from the trading fraternity are usually hints to do the opposite. In our view, the odds have improved for patient, fundamental investing. Here’s to some family time over Christmas and a prosperous 2019!

Andrew Bell, CEO of Witan Investment Services

 

Please remember that past performance is not a guide to future performance. Witan Investment Trust is an equity investment. The value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested.

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