What will 2019 bring? We're going on a bear hunt
Any reader with children will be familiar with Michael Rosen and Helen Oxenbury’s delightful book of a bear hunt which ends with the bear pursuing the adventurers back to their bed at much greater speed.
We see parallels in today’s markets. Investors risk appetite is still quite elevated, particularly in the US. ‘We’re going on a bear-hunt. We’re not scared.’ At the same time the environment, and particularly the lack of liquidity, is highly unfriendly. The main cause is central banks withdrawing liquidity, which on a range of 0 to 100 sat at 18.5 overall at end November. ‘Uh-uh! A forest! A big dark forest. We can't go over it. We can't go under it. Oh no! We've got to go through it! Stumble trip! Stumble trip! Stumble trip!’
Our view is that central banks have tightened too far against a still quite fragile world economy. The US Federal Reserve is showing some signs of realising this, but the ECB is at maximum tightness and is on course for a major policy mistake. We have for some time had a recession pencilled in for 2019 and we expect markets to wake up to that in the next six months. ‘WHAT’S THAT! One shiny wet nose! Two big furry ears! Two big goggly eyes! IT’S A BEAR!’
Equity markets may no longer be expensive but they are not cheap either. And many investors are too young to have seen what happens in a traditional bear market, especially when political risk is elevated as now and there are structural debt problems. ‘In to the bed. Under the covers. I’m not going on a bear hunt again.’
In fact, of course, bear markets throw up opportunities for canny investors. We’d guess that the best ones are likely to come up in Asia because that is where liquidity is strongest. The People’s Bank of China is relatively less tight, risk appetite is lower (ie. a better starting point for a new bull market) and cross-border flows continue to move away from Developed Markets.
But it’s a story for late 2019. In the first half, under the bedcovers is a sensible place to hide from the prowling bear. We wish we could end 2018 on a merrier and happier note.
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