Taken from December 2019 Newsletter:
2019 was a record year for global markets. After narrowly avoiding bear market territory in the S&P, global markets staged a dramatic rebound in the beginning of the year shrugging off any concerns that had led to the market sell off and propelling indices to record highs. Markets were compelled upwards by continuing positive corporate earnings and economic growth brought by worldwide government stimulus and intervention. Our cautious stance, although qualitatively merited by geopolitical volatility, did not estimate the fervor of investors in the face of a continuing bull market run.
We foresee increased potential for volatility in 2020. Underlying risk has continued to rise in lock step with the spectacular returns of 2019 without being priced in by market valuations. Markets ignored increasing global protests, unicorn flops and economic growth that was heavily premised on government intervention. We see these trends continuing into the new year; although we are not predicting an outright recession, we do not find the market as it stands particularly attractive. There are many potential avenues for the market to be derailed. The higher valuations, the worst the final outcome.
In the past year we have seen contentions grow with the current US administration and its pursuit of a trade war with China, the swings in the UK in connection with Brexit, as well as the rise of global protests shaking otherwise stable economic centers such as Hong Kong, Chile and India to their core. Markets have remained positive in the face of lowered GDP forecasts, reduction in corporate margins and even outright recession. We see difficulty sustaining this trend through 2020, as the current US administration vies to remain in power in the face of an election, developed nations grapple between inflation and ongoing stimulus and others such as Hong Kong continue to deal with the unrest of the masses.
In the last decade investors have pointed to emerging markets as engines for global growth. Money has in-flown into these countries premised purely on the potential for economic growth and the promise of the next China. This has ignored the cultural nuances, political disputes and other frictional damages within these nation that pose risk to these growth projections. For example, India has recently dealt with demonetization, tax reform, and highly controversial anti-Muslim initiatives leading to growing unrest within the country. Yet investors ignore this and continue to pour capital into the nation. Markets are ultimately tied to the underlying economies. This disconnect is unsustainable just as we saw with Argentina in 2019’s surprise election results.
The last few years have set the stage for some of the largest mega mergers that we have seen in history. As we reach what we perceive is the top of the business cycle, we predict that we will see corporations accelerate this trend and promote growth through acquisition. This will continue in hotbed sectors such as IT and Healthcare but we see particular focus in IT security, Alzheimer drug development and allogenic gene therapies.