GDP growth is expected to continue to slow over the next two years according to FactSet Economic Estimates. The consensus forecast shows 2.5% growth in 2019 followed by 1.8% growth in 2020. With the economic expansion now in its 10th year, there is increasing chatter from economists and market observers about a looming recession.
As a result of the 2017 tax cuts, forecasters are projecting that the federal budget deficit will expand to 5.0% of GDP by 2020, the biggest deficit we’ve seen since 2012. At the same time, we can expect to see growing trade and current account deficits.
Earnings: Higher Global Exposure = Lower Earnings & Sales Growth
As of today, the estimated earnings growth rate for CY 2019 is 8.0%. All 11 sectors are projected to report year-over-year growth in earnings, led by the Energy, Industrials, Consumer Discretionary, and Financials sectors. The estimated (year-over-year) revenue growth rate for CY 2019 is 5.4%. All eleven sectors are expected to report year-over-year growth in revenues, led by the Communication Services and Health Care sectors. S&P 500 companies with higher international revenue exposure are expected to underperform S&P 500 companies with lower international revenue exposure in terms of earnings growth and sales growth in CY 2019. The estimated net profit margin (based on aggregate estimates for revenues and earnings) for the S&P 500 for 2019 is 11.8%. If 11.8% is the actual net profit margin for the index, it will mark the highest annual net profit margin for the index since FactSet began tracking this metric in 2008.
Fixed Income: Subprime Auto Loans Spike and the Never-Ending Campaign Season
I love writing prediction articles. They allow for creativity and usually result in providing inspiration for other thought leadership and/or product demonstration material down the road. For 2019 I have five predictions:
Defaults in subprime auto loans spike, causing at least one private equity shop or hedge fund to abandon the space entirely.
The Fed is limited to two interest rate hikes as increasing politicization of monetary policy combines with a slowing growth story.
The yield curve fully inverts at least momentarily, causing a risk off environment and a short lived further down leg in equity markets.
The first 2020 Presidential Election advertisement airs during the Super Bowl, further accelerating the shift to a single non-stop election season.
Italy refuses to abide EU budget constraints, causing further confrontation and a near default scenario.
Activism: Another Big Year for Elliott Management Corporation
2019 Prediction: Given it’s huge size, global operations, and recent success overseas, Elliott Management Corporation appears well equipped to keep up the momentum and continue changing the global activism landscape along the way
Regulatory: The Slow Death of Post-Crisis Regulation Has Been Exaggerated
2019 will be the year when geo-politics fully infiltrates the regulatory agenda as climate change, cyber-security breaches, trade wars, protectionism and Brexit engender further market volatility and galvanize policy drivers. Sustainable finance and ESG matters, already embedded in the Capital Markets Union initiative, will no-doubt become more prominent, especially following recent revamped commitments to the Paris Accords. Brexit will also likely take centre stage, together with changes to existing MIFID II measures and the emergence of a new set of measures under the guise of MIFID III. We can also expect to see the first suite of MIFID II enforcement actions arise with transaction reporting, research and best execution rules hotly tipped to be key themes. Reviews of existing regulation will also divert the attention and resources of market participants, especially EMIR II, CRD V and AIFMD, whilst new regulations will come into effect such as the STS Securitization Regulation and the UK Fund ‘Value for Money’ rules, as well as extended application of existing regulations such as the Money Markets Fund Regulation and the Senior Managers Regime. Notable new developments will include the emergence of a Pan-European Personal Pension and the transition away from LIBOR. The perennial flow of modifications to prudential banking measures and oversight will also continue unabated.
The slow death of post-crisis regulation has evidently been exaggerated.
Wealth: Self-Service Tools for Portfolio Optimization
Well, I have never been good at fortune telling, but I firmly believe we are at an inflection point for the industry.
At any conference on Wealth Management/Digital Transformation in Wealth I went to in 2018 (and quite some), the imperative to embrace digital technology and to build a hybrid approach in Wealth Management was loud and clear, shared and understood by everyone present.
So for 2019:
With large strenuous projects like MIFiD II more or less implemented, Blockchain- and Cryptocurrency hype cooled down, there should be capacity to get real about the digital transformation in Wealth.
Not least, because an ever increasing number of your competitors will do it. Accelerating technological progress will make it extremely difficult to catch-up with early adopters from a laggard position.
So, if you don’t get started, experiment, learn & evolve in 2019, there is a risk that 2020 marks beginning of the end for your traditional non-digital advisory business.
The first is that the alpha associated with socially responsible investing will become a self-reinforcing feedback loop. In Europe, asset owners already have a strong preference for ESG investment mandates and in the United States there is a rapidly expanding appetite for the same. Companies with poor ESG records will face rising costs of capital and a shrinking investor-base as more and more folks adopt ESG principles. On the flipside, companies with a history of responsible corporate stewardship will be rewarded as investor preference shifts. Asset managers who position themselves correctly stand to benefit as this shift occurs.
Secondly, I believe the sophistication of how ESG concepts are applied to the portfolio management process will increase. As firms continue to adopt advanced techniques, those who use ESG to “check the box” will find it harder and harder to compete. Already, some large pension funds and institutional asset managers have built out teams to specifically focus on ESG. As this trend continues, I’d expect to late comers to the game finding it harder and harder to compete.
Alternative Data: A Field Likely to Make Waves in the Near Future
Advancements in technology specifically in Artificial intelligence Research, will continue to transform the financial industry. In our opinion, the real value lies in the increasingly sophisticated tools required to analyze increasing volumes of sustainability data; tools that aid in making sense of the ever increasing amounts of data that exists will continue to grow in popularity and applicability to both the stock holder and stake holder.