Read our full Mazars Quarterly Investment Outlook- Q1 2019

Outlook 2019

Sometimes it appears that the world is getting louder. The Norwegian Sociologist, John Galtung said that if a newspaper came out once every 50 years, it would not report half a century of celebrity gossip and political scandals but rather momentous global changes such as the increase in life expectancy. Yet on a daily basis, news outlets, whether mainstream or social media, increasingly focus on negative and often trivial news. The murder of a missionary out on the coast of India made global news, while his life visiting dangerous places to fulfil his mission did not.

Financial outlets -and even sanguine broker reports- are often no different. The problem is that in the short-term, risks prevail. The market is tanking? Maybe this is the end of the cycle. The market is rallying? Dangers lurk for investors who get on the bandwagon. The trick, after all, to catch attention in a loud world is often to shout and “cry wolf”.

Most of the world, we experience not through our direct senses, but through our TVs, our phones or our PCs. The nature of news is likely to distort people’s view of the world because of a mental bias Amos Tversky and Daniel Kahneman called the Availability heuristic: people estimate the probability of an event by the ease with which instances come to mind. If our mind is full with risks, this will be reflected in our approach to financial management.

In this annual outlook, we seek to walk the fine line between the long term view, one that would be reported by a newspaper that comes out every 5 years –an investor’s true horizon- and short term risks. Annual outlooks tend to take the current situation and extrapolate linearly into the future, which is why they are usually accurate for the first couple months of the year but binned by June. Instead of simple projection of current events into perpetuity, we seek to distinguish the underlying economic and financial currents, between short term noise and long term signal. Shorter term risks are cyclical in nature. They may materialise, but their effect is transitory. Conversely, structural risks are longer term and when they do manifest, they have the power to permanently alter the economic landscape. Our approach to forecasting is thus non-linear but assumes a modicum of cyclicality overlaid on top of our longer term ‘true investor’s time horizon’ view.

Global Outlook

Across all regions, our conviction for the next year is somewhat moderated by volatile politics which tend have an outsized impact on economic and corporate fundamentals, even as the financial cycle turns 10 years old, the longest in post-war history. Globalisation, which has underpinned the world economy since the end of WWII, is now under siege by nationalist politics. The trend is self-reinforcing. When a country says “I will look after my own interests” it compels its trading partners to do the same. And when that country is the United States, the de facto economic, technological, cultural and military leader of the developed markets for the past 80 years, its actions reverberate across the world at great speed. Germany’s potential inward turn, as Angela Merkel’s power is waning, could have the same effect in the Eurozone.

At the end of 2018 the US economy diverged from the rest of the world. A Chinese slowdown is hurting global growth and trade, especially its Asian partners, who have also been hit by Dollar repatriation. Europe has slowed and Japan saw negative growth for the second time in three quarters. While the forces driving those trends are strong, we feel that there’s a strong probability their effect will wear off during the coming year.

Asset Allocation

We remain cautious on the UK due to uncertainty regarding monetary and fiscal policy in the wake of Brexit. Aside from an underweight UK position we have no strong geographic preferences. In January 2018 the investment committee remained overall bullish on risk assets, recognising that equities continue to offer more value compared to bonds. It also acknowledged that the risk of a black swan -an unforeseen cycle-ending event- is rising. We thus decided to tactically take some risk off the table, reducing our equity overweight to “Neutral” and place the proceeds in cash. In April, we redeployed some of this cash into Gold, to enhance investor returns in the face of increasing volatility. During our June investment committee we maintained our stance, recognising that nothing has changed for our investment thesis. During our September investment committee, we did not make material changes in our asset allocation. However, we reduced our cash buffer by 1%, allocating the proceeds to short-term bond funds. Additionally, we significantly reduced our weighting in absolute return funds, as we feel that their investment thesis could be significantly challenged in a higher standard deviation environment.

At the beginning of the year, we also reduced the number of funds in the portfolio to increase the focus on those fund managers that make a difference. The underweight in bonds was maintained, as we feel that they continue to be expensive versus equities. We still favour large-caps but are more concerned about high dividend stocks as the global economy accelerates. In the bond space we maintain an exposure in longer dated Gilts and shorter duration corporate bonds, adopting a more ‘barbell’ approach for the fixed income part of our portfolios.