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5 ways the market will turn 2018 on its head

Fund manager makes some bold predictions.

Jack Derwin

Digital Journalist, Your Money

Perhaps acknowledging the difficulty of making year-long forecasts, a Sydney fund manager has contended with making six-month market predictions.

And it would appear that the new year is set to challenge a lot of the conclusions of financial markets in 2018, says Morphic Asset Management.

Taking a contrarian view, these are the five things the firm says won’t happen by 30 June 2019.

1. Emerging markets will not underperform

After having a horror year for much of 2018, it will be emerging markets (i.e. those that are not yet fully developed) that will shine in the first half of 2019.

“We expect [emerging markets] to beat world markets… we think China has probably bottomed on most measures and if China goes up then EM will go up,” Morphic managing director Jack Lowenstein told Trading Day.

That performance will be supported by a US Fed that has slowed down in raising interest rates, a likely truce in the trade war between China and the US, and an oil price that stabilises or goes lower.

“The reality is that the three biggest [emerging markets] as far as we’re concerned are China, India and Brazil and all three for various reasons look good,” Lowenstein said.

2. Europe will not outperform Japan

Similarly, at the start of 2019, Japan is looking relatively better value than Europe, according to Lowenstein.

“Europe is a little bit more expensive, or quite a lot more on some measures, than Japan,” he explained.

“Japan has by its own standards quite high return on equity, valuations are low and there are no negative earnings predictions, but the real clincher for us is that people view Brexit as something that only affects Britain but the truth is Brexit won’t stop at the English Channel” he added.

That will continue to wreak havoc on the European market for at least another six months.

3. The US will not finish lower than December 2018

With US equities reaching their lowest point on Christmas Eve, there’s plenty of upside in Lowenstein’s view.

“If trade fears are abating, then there’s quite a good chance that the US stock markets most likely pick up a bit of ground,” he explained.

“It’s probably oversold [and] there is some earnings growth there. I would be positive on the US at this stage.”

4. Australia will not avoid political volatility or underperformance

As a federal election looms in May, Australian politics looks likely to continue to cause our local market to underperform.

“You would have to be a pretty rash man to bet against Labor winning the next election and I just can’t see how Labor’s policies as currently laid out are positive for markets and they’re probably not positive for the Australian dollar either,” Lowenstein said.

5. Two-year interest rates won’t go lower

“2019 will see a strange dichotomy – a Fed that walks back on their rate hikes, but a bond market that went too far in pricing cuts. Hence an odd outcome: economists revise down expectations of Fed hikes, yet bond yields don’t fall,” he said.

Watch the full interview.

Plus: Why this bank is predicting an unlikely Aussie recession
Plus: 7 easy steps to build a stock portfolio
Plus: How you could boost your super by $80K+

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