Rotten Apples and All
‘Friedrich von Schiller kept rotten apples in his desk. He claimed that he needed the scent of their decay to help him write’ – Mark Ezra Stokes
Happy New Year! It seems strange to find inspiration for the 2019 financial markets in the strange customs of an 18th Century German romantic poet…but the high profile fall of Apple (AAPL) shares in the last few weeks has also been hugely surprising to me. The Global Dynamic Opportunities Fund does not hold any Apple shares, but seeing such volatility in the shares of the first American company to hit a one trillion dollar market capitalisation, is the best indication of the potential for individual stock selection to add value this year.
Why so? Well at the macroeconomic level when there is a high level of worry, then a lot of pessimism tends to already be priced in. Of course we all know where UK-specific concerns predominately lay…and this is with the outcomes of the Brexit debate. Clearly this is the subject with a hundred different end outcomes but our central scenario for 2019 remains that the most extreme Brexit outcomes (centred around a ‘no deal’) can be avoided and a ‘soft’ or ‘no Brexit’ reality is much more likely. This means prospects for UK investment opportunities are quietly – and positively – bubbling up, especially with the attractive dividend yields apparent in many UK shares currently. The UK remains our highest allocation zone within the Fund.
Elsewhere, the last few weeks of 2018 saw some improvement in the diplomatic mood music between the United States and China in their discussions about the future structure of their trade relationship and this is reflected by face-to-face meetings between the countries this month. For global investors the avoidance of a major trade spat between the world’s two most influential economies is the most important influence on investment returns in 2019. The better news is that both the United States and China have clear incentives in terms of the performance of their local economies to avoid this. This is good news for the emerging markets where we see better prospects in 2019 and anticipate augmenting our regional allocations to the major Asian markets during the year.
As for Continental Europe, it is likely the European Central Bank will follow through on its desire to stop new quantitative easing at the margin. A rate rise in late 2019 still remains very plausible and this would be a good step. However, Europe still needs some help and a greater use of fiscal policy is sensible. This is consistent with an Italian budget deal and more fiscal spending at the margin from other key Eurozone countries, as noted in the 2019 proposed German budget and even the recent Macron response to his ‘hi-vis’ recent local rioting. Europe will remain macro noisy but at the micro level many may be surprised at our prediction that Europe will beat the US when it comes to anticipated earnings per share growth in the year ahead. This will mean plenty of stockpicking scope within Continental Europe during 2019.
In short we are cautiously optimistic about financial markets in 2019 although naturally hard work and continued communication remain as important as ever.
Chris Bailey, Chief Investment Officer
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Daniel Stewart & Co provides investment, funding, foreign exchange and fund management services to individual and corporate clients. Each week our experts comment on some of the developments from macro to micro that have caught their attention.