Zehrid Osmani, Portfolio Manager, outlines his views on the major opportunities, trends and expectations for 2019
What are the most exciting opportunities?
The market is becoming increasingly anxious about risks of a recession, which is likely to bring more volatility in 2019.
In my view, this is a great opportunity for long-term investors like us because it should allow multiple entry points to gain exposure to the companies that are tapping into some powerful long-term trends.
In particular, there are three big mega-themes, each supported by strong multi-decade growth drivers, which will provide the basis for much of our research. These are:
With the rapid expansion of the emerging market middle class, one area which is going to be of interest in 2019 is luxury goods.
At a time when the market is worried about a short-term slowdown in China, we believe there may well be a good opportunity to increase exposure here.
With a global movement to reduce the human impact on the environment and preserve our precious resources, the development of electric vehicles is a key theme for us.
This trend will be driven by both regulations – as governments legislate to enforce the switch away from the internal combustion engine – and consumer demand, as more environmentally aware customers seek out cleaner forms of transportation.
The future of technology
We see robotisation and artificial intelligence as multi-decade trends. As companies look to automate part, or all of their processes, it pays to identify the firms which are investing now to either disrupt their own technology or that of the industry.
In our view, these are the firms that are likely to be the winners over a longer-term time frame. We therefore continue to ensure that we orient our research pipeline on long-term investment opportunities, to recognise and invest in future value creators with attractive quality growth characteristics.
As a result of this, we are likely to increasingly identify some companies at an earlier stage in their industry life cycle.
Disruption – winners and losers
Ultimately, disruption is an important aspect we consider in all our analytical work.
It is critical to assess disruption risk in any industry we cover and we seek to identify the potentially attractive disruptors, while avoiding the companies at risk of having their business model disrupted.
In 2019, we will be looking, in particular, at disruption threats from the large US-based technology giants, which will continue to deploy their substantial cash piles in new, growth areas adjacent to their existing businesses, presenting a sizeable disruption risk to established firms across the globe.
What are the risks?
There is a risk that the global trade war that came to the fore in 2018 will worsen in 2019, bringing with it the wrong type of inflationary pressure – that is, the regulatory-driven kind.
This has the risk of bringing a sharp slowdown to global activity, while pushing central banks towards more tightening measures – an unpleasant combination for equity markets.
There is certainly the potential here for investors with a shorter time horizon to be spooked.
Risk creates opportunity
However, as mentioned before, we believe these risks create opportunities for long-term investors such as ourselves.
Specifically, to initiate holdings in companies that we see as being exposed to long-term secular growth drivers at attractive valuations.
Looking at Europe, uncertainty around Brexit – specifically the shape of the final ‘divorce’ deal – and Italian sovereign risk will both be a preoccupation for markets.
Central bank policies will also remain an important focus, in the context of economic momentum which could be weakening across the European Union, China and the US.
What’s everyone missing?
There are four key aspects we think the market is missing:
- Pricing power
In a market where inflationary pressures appear to be picking up, we think it’s important to focus our analysis on finding companies that have pricing power to protect their margins.
Our research specifically identifies companies with pricing power, and assesses their ability to continue to increase prices.
Ultimately, we believe there will be a return to the trends of low inflation, but even in such an environment, pricing power remains important.
- Recession – not if but how
The market is worrying about a growing risk of recession. Given we are already in the latter stages of what has been the longest economic growth cycle in history, it is likely that a recession will be coming at some point in the next two to three years.
Instead, it is more relevant to reflect on and assess the shape of the next recession – how deep or shallow it might be, and how prolonged.
If we are faced with a shallow and short-lived recession, we think this would give a great opportunity for long-term investors to get involved in the asset class again at attractive levels.
- Renewed economic momentum in the US and China
The trade tensions between the US and China could ease and/or get resolved successfully, given that both nations are negatively impacted by such friction. China could put in place some stimulative economic measures to ensure its economy avoids a hard landing.
Meanwhile, President Trump could be thinking about ensuring a supportive economic momentum for the US economy, as his focus shifts towards being elected for a second term.
We think there could be some upside surprise to policies that his administration puts in place to ensure that economic activity stays supportive.
- Accelerating M&A
Despite M&A activity in 2018 reaching record levels (both in the number of deals and the size of those transactions), we believe the market might be underestimating the potential for this activity to accelerate even further in 2019.
This will have the potential to bring periods of euphoria to the market as we have seen in the past at this late stage in the cycle.
All in all, 2019 will no doubt be an eventful year in the markets, given the many uncertainties and investors’ focus on shorter-term risks.
In such an environment, it will be a good time to be a proper investor – it will be a good time to be a long-term, unconstrained investor.
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