Is this the year to buy?

Will 2019 reap big rewards? Is this a time to buy, and what sectors should you buy into?

Article updated: 4 January 2019 9:00am Author: Michael Baxter

2018 was an awful year for investors. Does this mean that 2019 will reap big rewards? Is this a time to buy, and what sectors should you buy into?

Sell on rumour, buy on news. Or so they say.

2018 was a dreadful year for stock markets. Many are seeing similarities with the build-up to the 2008 crash, I am not so sure. The similarities seem closer to the build-up to the dotcom crash to me.

Or maybe the worst is over.

The last few years have been relatively good for the global economy, the US boomed last year. The UK was doing pretty well until its self-inflicted wound called Brexit. The euro area was at last showing signs of putting the bad times behind it. Even Japan was doing alright.

The markets are, on the whole, good at predicting these things, and this good ish economic news was reflected in stocks, but in advance. Stock market rises in 2015 and 2016 gave us advance warning of the recent run of quite good economic news.

Where the markets got things wrong, was to carry on buying when Trump was elected. The markets failed to price in the consequences of the rise of populism and Far Right politics.

Trump’s plans for a trade war, focus on traditional industries such as ‘beautiful clean coal’, and tax cuts, at a time when the economy was close to full capacity, had disaster written all over them.

And now the signs are emerging that things are indeed getting worse for the global economy. Apple blames its first profit warning since 2002 on the slowdown in China. The latest purchasing managers index or PMI tracking US manufacturing has fallen sharply. Likewise, the latest PMI tracking the eurozone has fallen too, the index for Germany, for example, is at a 33-month low.

On the other hand, the latest PMI for the UK was quite good. Growth of new orders accelerated to a ten-month high, said IHS Markit, which along with CIPS compiles the UK PMIs.

I don’t expect 2019 to be a good year for the economy. But then that is largely already allowed for by the markets.

Recession or slowdown?

During the first half of last year the markets looked frothy and there was way too much complacency regarding the global economy. I said this so often that I got criticised in the comments section for being an old misery.

The question is, will the economic situation continue to worsen, will we fall into recession, or is the economy merely going to slow down, before picking up again in 18-months or so time?

If it is the latter, then markets may have seen their worst. They already reflect a weak economy in 2019.

They have not fallen far enough to reflect a recession. So if markets expect the economic news to turn from bad to dire, more stock market falls will occur. If that is so, then now may be a good time to look at mature stocks, the high dividend payers, companies that soldier on in the good and bad times.

Maybe not so bad

But I see precious little evidence of a likely surge in inflation. The global economy is probably slowing too fast to have to worry about that.

As a result, US interest rates may be close to peak, and the Fed may have latitude for rate cuts later in the year.

The Trump tax cuts have not led to the surge in inflation I feared, rather they have had a short-term effect on the economy that now seems to be going into reverse.

My sense, right now, is that short of a disastrous Brexit outcome, and short of an escalating trade war, or some other self-inflicted economic wound, most of the global economy will avoid recession. Maybe Germany and Australia are the exceptions.

If that is so, then frankly stocks seem pretty cheap to me.

Techs will probably struggle this year, indeed I fear further big falls akin to the dotcom crash. Right now, sentiment is not with techs. At some point they will fall so low, that they will become a bargain.

Time to buy?

Tech stocks will fall further in my opinion. For the reasons outlined above, the wider stock market may fall, depending on whether the global economy continues to deteriorate.

But it is difficult to time buying and selling with stock market swings correctly. Only lucky investors sell at the top of the market and buy at the bottom.

I would say that while stocks may have further to fall, looking at them over a longer term horizon, they seem pretty cheap right now. This even applies to tech stocks, they may well fall much further, but even so, they are relatively cheap and may make quite good, longer term plays.

PS

This morning, came news that UK shop prices rose quite rapidly in December. If this continues, the Bank of England may have to increase interest rates more quickly than previously expected. But my overall sense that the global economy is slowing too fast, that inflation will be subdued and most central banks can be quite loose with monetary policy, has not changed.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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