Blog: The only predictable trend in 2019 will be unpredictability

Callum D'Ath

It was a turbulent 2018 for markets. Between Brexit, international trade wars, and tech sell-offs there’s been a lot of uncertainty for investors to contend with. It’s perhaps no surprise then that volatility returned to stock market indices – in fact, some analysts said that share prices hadn’t moved so much since the financial crisis.

Markets are a barometer, not a thermometer – they provide broad indications that the season is changing, rather than the exact temperature. By the end of 2018 the FTSE 100 was down around 10 per cent, which suggests choppy times still lie ahead, at least in the short term.

However, there are reasons to be sanguine amid that gloom: price-to-earnings multiples on many shares are significantly cheaper while profits are growing. Apart from the obvious outliers, debt isn’t too much of an issue for many companies. And despite volatility, shares look good value; particularly when compared to the returns available from alternatives – a 10-year UK gilt, for example, yields just 1.26 per cent.

There are, nevertheless, inevitably going to be further bumps on the road. Some economists have pointed to a slowdown in the US in the next 12 months, followed by a recession in 2020. Perhaps that’s to be expected: interest rates have been rising stateside and the jobs market has tightened – both indicators that the economic cycle is in its latter stages.

A weakened dollar could be a boon for emerging markets in 2019, after their struggles over the past 12 months. Argentina and Turkey, in particular, hit headlines because of crises in their currencies in 2018 – but whether that happens again will largely depend on investor sentiment, with the dollar usually a magnet for capital during times of uncertainty.

There could well be headwinds from Europe too. Political unrest in France and Italy aside, the European Central Bank called time on quantitative easing in December 2018, bringing to an end €2.6 trillion of asset purchases. The repercussions of that decision, at a time of concern over growth on the continent, will likely reverberate into 2019.

Of course, closer to home, the small matter of Brexit remains very much up in the air. That could well continue into the first few months of 2019 and there are signs investors are growing very fearful, with a record £7.8bn taken from UK equity funds in 2018 up till mid-December. As a result, the UK market looks cheap, with an aggregate yield from the 100 largest businesses hitting 4.9 per cent.

Yet, it’s been a tough time for many companies in Britain. The collapse of Carillion set 2018 off to a bad start and was followed by fears over other outsourcing and infrastructure companies, such as Interserve and Kier Group, later in the year. Retailers have also had a torrid time, with House of Fraser, Toys R Us, New Look, and Debenhams among a host of household names to hit headlines for their troubles. With online fashion retailer ASOS announcing a profits warning in December and Mike Ashley’s counsel of ‘the worst November on record’, there are signals that consumers are tightening their belts across the board.

Does all of this bode ill for 2019? Some have said as much – but plenty of commentators have been predicting the end is nigh since 2008. The most likely outcome appears to be that we will have some kind of downturn this year – but it shouldn’t be anything like the crisis that engulfed the world a decade ago: the financial system is in much better health than it was then.

Predictions are never easy to make, let alone get right. But the early indicators suggest that, if anything, the unpredictability of the past 12 months could continue, or even intensify, in 2019.