The Tatton 2019 Outlook

14 December 2018

It is that time of year when our inboxes are flooded with outlook research reports for the year ahead. Not overly surprisingly perhaps, houses with particularly positive market expectations last year are this year looking pessimistically into the future, whereas those who thought 2018 might turn choppy for investors tend to be looking more optimistically to 2019.

At Tatton we belong to the latter group, although we recognise that the longer the current economic cycle becomes the more prevalent the risks that could bring it to an end. So, from our perspective there is a good balance of opportunity and risk ahead, which will keep us potentially even more busy in our portfolio management efforts than during 2018.

The 2019 outlook replaces our usual weekly schedule of market coverage this week. This is just as well, given the Brexit clarity we expected to have by now is still nowhere to be seen.

However, the tumultuous political spectacle the UK experienced was not mirrored elsewhere. Italy and the European Commission are getting ever closer in their budget negotiations, which leads us to believe that our forecast from a few weeks ago that the matter will be settled before the end of the year may come true. This would resolve one of the major Eurozone conc
erns and, together with French President Macron's announcement that he will likewise look to loosen the public purse strings to appease recent civil unrest, may mean that fiscal austerity across the Eurozone is finally ending for good.

The US trade war with China also saw some de-escalation over the course of the week, as both sides seemed keen to not let the arrest of Huawei's finance director derail the restart of trade negotiations.

Despite all this good news, equity markets continued with their deterioration of outlook narrative and erased their gains from last week. We lay out this week why we believe that markets are overshooting on the downside now as much as they overshot on the upside last year. Despite this more optimistic outlook for 2019, market conditions are currently characterised primarily by downward momentum, which is additionally driven by dwindling liquidity as the year draws to an end.

Therefore, before we consider eliminating our risk underweight position which has served us well over most of 2018, we will watch and wait until the beginning of the new year. We may then see a change in prevailing market sentiment, putting risk assets once again more in line with actual economic and corporate earnings fundamentals.