Challenging 2018 for Equities, But a Better 2019 Lies Ahead



It has been a very challenging year for equities. Only US stocks and the tech sector rose year to date. You can click on the hyperlink below. 



Emerging markets and European equities fell by close to 20%. 

Investors would have made money by converting domestic currencies to USD, investing in several sectors:

1. Short Emerging Markets ETF. Denominated in USD. EUM US Equities (Bloomberg ticker).
2. Short European Equities ETF. Denominated in USD. EPV US Equities.
3. The latest position was to buy companies that produce medical marijuana. The sector shot up. Canopy Growth, from Aug to Sep, rose by close to 100%. Medicinal marijuana is about to be legalised in the US and spurred most stocks associated with it.

Outlook:

1. I expect emerging markets and European stocks to continue the down trend until post Nov 2018.

2. The US mid term elections will have a positive impact on stocks worldwide. If the Republicans lose ground, President Trump is likely to be impeached. If the Republicans gain ground over Democrats, Trump is likely to be more cooperative with trade talks as even he recognises that tariffs will eventually hit the domestic economy.

3. However, towards the end of 2020, I expect the US to hit a recession. This meant that any rebound in Emerging and European stocks in 2019 will eventually end in 2020, brought down to earth by sky high valuations of US stocks. The recent valuation of US stocks is likened to the height of the tech bubble in 2000. The following 10 years, between 2000 and 2010, US stocks returned virtually nil, while emerging markets and the rest of the world had massive rallies. The wheel of fortunes often rotates from markets to markets, much like properties. 

4. The £ appreciated recently as the EU chief negotiator believes a deal is possible before Brexit. The so-called "Chequers deal" is Prime Minister Theresa May's favourite, which is similar to a customs union: free movement of goods but not services, free movement of people. May is likely to face resistance from members of her own party which are adamant on a hard Brexit, which includes restriction of flow of people. There will no doubt be more twists and turns even after March 2019. 



5. If 2018 was a horrible year for ex-US equities, 2019 is likely to be better due to points 2 and cheaper valuations.

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