When stock markets sell off rapidly, it is easy for investors to be sucked into trading. But stock market turmoil creates a lot of false signals; it is a time to focus on the big picture. Global growth will slow in the coming year, but recession in the world economy remains unlikely. In the UK, real wage growth is helpful, but likely to remain subdued, and the Bank of England (BoE) will have no reason to raise interest rates in the next 12 months.
What can look like new trends are sometimes quickly reversed. For much of 2018, oil looked the place to be, but the sector has sold off almost as sharply as other cyclicals. A market change that initially looked like a rotation from growth to value has become more complex. Quality stocks – more defensive businesses such as consumer staples – might not prove safe in 2019. The theme for the year may not be trade wars, commodities or geopolitics, but debt. Leveraged companies will find it harder to raise money from shareholders, and bank finance will tighten. Investors will need to look harder at accounts to identify true cash generation. Some smaller companies could see distressed refinancings and larger ones might be forced to cut dividends. Inflation will not pick up enough to bail out businesses with strategic weakness, or that do not generate cash.
The UK equity market might be better placed than some others. Shunned by international investors and with retail outflows since the referendum, it looks under-owned. As an economy with leadership in several sectors, an independent monetary policy and a relatively free regime on takeovers, its appeal may be rediscovered.
Global disinflationary pressures remain, challenging many incumbent businesses, including the consumer staples. UK real wage inflation should help to insulate some consumer businesses. Airlines and travel may have sold off too far, particularly in the face of cheaper oil. But despite the challenges for technology and e-commerce, the disruption in retail and financial sectors will continue in 2019. Investors need to look for genuine growth businesses or industrials that have fallen to distressed prices.
A version of this article was published in Investors Chronicle on 13/12/2018.