To underline the point, as we put the finishing touches to our bumper issue all hell has broken loose in Parliament. Conservative anger at the eleventh-hour cancellation of a Commons vote on Theresa May’s Withdrawal Agreement has prompted a vote of no confidence in her leadership, set to take place as the final pages head off to the printers. As I write it looks like the prime minister will survive, but that does not mean that a consensus on how to leave the European Union at the end of March 2019 will follow. Expect more chaos on the Brexit front in 2019 – chaos that could worsen if Tory infighting escalates towards a general election they could very well lose.
That, of course, means further uncertainty for the British businesses which form the bedrock of many of our portfolios – and European ones too, for whom the UK is an important market (in fact, European Smaller Companies has been the worst-performing fund sector so far in 2018). One side-effect of uncertainty this year has been a continued flight to safety, whether that’s represented by a strong US economy or so-called bond proxies in the form of large, cash-generative and often global businesses. The side-effects have made life even more difficult for investors, sucking capital out of more risky markets (which, alongside emerging markets, now includes the UK and Europe) and pushing up the price of these relative safe havens. Thus, investors are faced with two problems: whether to potentially overpay for quality assets, whose outperformance may anyway have run its course, or try to catch falling knives, which may fall further. Neither seems a very palatable alternative.
Yet our analysis suggests that, with many putting plans in place for a messy EU divorce, UK companies are not quite as unprepared for what may lie ahead as the current depressed valuations of the UK market may suggest, while EU contingency planning for a no-deal Brexit appears to contradict some of the most hysterical economic predictions. Indeed, it is noteworthy that the third best-performing sector this year, UK Direct Property, was written off in 2016 after the referendum in anticipation of a business Brexodus that never materialised.
So, if the great trade of 2018 has been to buy into strength – the US, and particularly US tech, being the winning sectors this year – so the theme for 2019 could be to seek value in the weakness of misplaced fearfulness, as many fund managers in our survey this year suggest. In the meantime, have a Merry Christmas!
