European Long/Short Outlook 2019

5 December 2018

A dynamic period of change lies ahead for Europe in 2019. Portfolio managers Michael Browne and Steve Frost discuss what investors can expect for European companies and markets.

What’s in store for 2019?

• The year ahead is going to be extreme and should provide good opportunities on the long and short side.
• The macro picture for 2019 is blurred, with a lot of uncertainty for investors. Within Europe, there is the issue of Brexit, a change in German political leadership and crisis in the Italian government. Elsewhere, US/China trade discussions and the US Federal Reserve raising rates will also impact markets.
• Markets have years where they explode upwards or have problems on the downside. This caters for what we do – we can take opportunities in falling and rising markets and try to manage volatility.
• The focus for us is on earnings momentum and good-quality companies. If growth comes through, stocks currently look cheap.

Monitoring the risks

• 2018 has seen severe selling pressure from investors, who are underweight equities, particularly European equities.
• We are faced with a potential ‘ghost recession’, where markets fear the possible outcomes, rather than the reality.
• We monitor this environment through our macro matrix (a series of macro and credit indicators). These have worsened in 2018 but will stabilize at some point.

Structural challenges for autos

• The auto industry has a material effect on the European economy as a whole, it has had a disastrous 2018 from a management point of view.
• The industry failed to prepare adequately for the European Union testing procedures (WLTP), leading to cars that companies can’t sell.
• For 2019, there’s not a lot wrong with demand, so we should anticipate a bounce back in production levels – which feeds into other areas of industry, as well as finance.

The Brexit question

• In a modern context, this is an absolutely unique set of circumstances for investors. You probably have to go back to 1963 and the Cuban Missile Crisis for a scenario which had such a binary outcome.
• The different permutations for deals (or no deals) means the reaction for businesses in 2019 is very hard to call. A no-deal, cliff-edge Brexit would be a ‘black swan’ event for the markets and have profound implications for trade, sales, profits and the value of currency, while a UK within a customs union could see business continue as usual (but for how long?)
• Businesses want certainty, in order to make investment decisions and ultimately put returns back to shareholders.
• As long/short investors, we need to be agile and quick to react – and importantly not get caught up with the herd.  

The Outlook for 2019

Our portfolio managers look at what 2019 has in store for investors, the Good, the Bad and the Surprising.

All Outlooks