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AIC fund manager poll

10 December 2018

UK and US tipped for 2019 but trade wars greatest threat.

Investment company managers named the UK and the US as the regions they think will produce the best stock market returns in 2019 in an annual fund manager poll by the Association of Investment Companies (AIC).

Despite continued uncertainty surrounding Brexit and the US recording its longest bull market in history, managers believe the UK and the US have the greatest potential to reward investors next year. Both received 27% of the votes, the highest proportion, followed by Emerging Markets (20%). However, managers viewed Emerging Markets as the strongest region on a five-year view, with 33% of voters expecting it to produce the highest return. The US was also popular over this timeframe, getting 20% of votes, followed by the UK, Europe and Asia Pacific ex Japan all receiving 13%.

Cause for optimism and threats

Despite recent uncertainty, investment company managers felt global growth remaining relatively strong was the biggest cause for optimism in 2019 (33%). This was followed by the possibility of a positive Brexit outcome (27%).

On the other hand, trade wars were viewed as by far the biggest threat to equities over the coming 12 months. They received 47% of votes, significantly outstripping managers’ next biggest concern which was monetary tightening (27%).

Where will the FTSE 100 close in 2019?

Nonetheless, manager optimism remains strong, with 80% expecting stock markets to rise in 2019. Estimates as to where the FTSE 100 might close at the end of 2019 centred around the 7,000-7,500 range (40% of respondents), with 20% expecting a close between 7,500 and 8,000 and a further 20% favouring 6,500 to 7,000.

The UK’s strong prospects

Simon Gergel, portfolio manager of Merchants said: “Rather than 2019 being a year for making resolutions, it promises to be a year of resolution.  The fog should gradually lift on what Brexit will actually mean for the UK as well as who will be leading the country. An end to uncertainty could release pent-up demand in the economy and could herald a return of foreign buying of UK equities, and a revaluation of the stock market from depressed levels.”

Alex Wright, portfolio manager of Fidelity Special Values said: “The unrelenting negativity that investors are demonstrating towards UK equities is making me feel more and more positive on their prospects for 2019. It might be counterintuitive to think that the UK market could be among the top performers globally in the year that we leave the EU (if indeed we do). But markets have a way of confounding expectations and surprising the consensus.

“I do not have a view on whether a soft or hard Brexit is more likely. My positive outlook for UK equities simply relies on some clarification in the relationship between the UK and the EU, which would act as a catalyst for investors to revisit the UK equity market as a destination for capital. It may be a cliché, but investors really do hate uncertainty, and for global asset allocators, there has been little incentive to do the work on cheap UK shares.”

Callum Abbot, co-manager of JPMorgan Claverhouse said: “If we see market concerns abate on Brexit, trade wars and US monetary policy easing then equity markets can rally after a challenging end to 2018. The UK equity market is particularly unloved due to Brexit, a palatable resolution could be a ‘double dividend’ through a re-rating and a re-allocation to UK equities.”

Alasdair McKinnon, manager of The Scottish Investment Trust said: “The political climate is volatile. The US-China trade war is unpredictable, especially for emerging markets. Europe faces rising political upheaval and closer to home, Brexit will obviously be key. Investors currently view the UK market as toxic. Can it get worse? Potentially yes – but for contrarians like us, some of these unloved markets are starting to look like the sort of ugly ducklings that present attractive long-term opportunities.”

Positive outlook for 2019

Andrew Bell, Chief Executive of Witan said: “Equity valuations appear very reasonable to us, given that interest rates are set to remain low and assuming recessionary risks, such as from adverse trade policies, are avoided. Recent months have seen more encouraging news on trade disputes, interest rates, oil prices and even Brexit (where a cliff-edge no-deal exit now seems improbable). Equity markets have chosen to focus on worries about slowing economic growth that may prove to be overblown.”

Simon Edelsten, fund manager of Mid Wynd International said: “We take a positive view of equity markets in 2019 as valuations have recently come down to attractive levels.  2018 saw a combination of rising US interest rates, trade wars, Brexit and a world economy slowing its growth rate from a very high level.  Many of these issues may moderate in 2019 with US rates, in particular, not needing to rise much further given more modest growth and persistently low inflation.”

Jean Roche, co-manager of Schroder UK Mid Cap said: “Our outlook for 2019 is cautiously optimistic as the UK market is inexpensive and expectations are low, against an economic backdrop which is far from dire, with record low unemployment and a return to real earnings growth.”

Tech disruption offers both opportunities and threats

Nick Train, manager of Finsbury Growth & Income and Lindsell Train said: “‘In the future all companies will be Internet companies’. We continue to find Andy Grove’s observation of great relevance for understanding the performance of the UK and global equity markets. His quote seems to us to be true – in that most companies we know are indeed becoming more like internet companies.  But it also provides explanatory power for the way stock prices are performing.  In 2019 it looks as though working out which companies are advantaged and which challenged by digital disruption, may deliver better returns than establishing what is currently ‘cheap’ or ‘dear’ or whether macro-economic trends favour ‘cyclical value’ or ‘quality growth’.”

Jean Roche, co-manager of Schroder UK Mid Cap said: “Opportunities are plentiful in classic ‘stockpicker sectors’ undergoing or driving structural change, such as retail and technology. The result of this is that the risks lie mainly in disruption, where companies or management teams who do not innovate get left behind. Mid-caps, our area of focus, are ideally positioned to be able to adapt to a changing world as they tend to be nimble whereas elephants (large-caps) rarely gallop.”

Dan Whitestone, portfolio manager of BlackRock Throgmorton said: “The rate of industry change is accelerating in our view. This is an exciting time to invest as we try to identify the new wave of emerging companies coming through, as well as detecting any flaws developing in existing business models. We believe that industry change, often in some form of disruption, such as in distribution or manufacturing, or indeed changes in consumer behaviours, will be a key driver of stock market returns in the years ahead, both positive and negative.”

Trade wars, valuations and debt

Simon Edelsten, fund manager of Mid Wynd International said: “The greatest risk is a further deterioration in US-China trade relations and a knock-on hitting other emerging markets.  We have therefore positioned Mid Wynd International to benefit from growth opportunities in automation, online services and tourism, but selecting investments on modest valuations, well supported by cash flows and strong balance sheets.  A well-diversified and modestly valued portfolio should cope with the surprises that 2019 has in store.”

Peter Spiller, manager of Capital Gearing said: “There are two big risks that we see. First, valuations of all financial assets have been hugely distorted by quantitative easing and remain at very high levels compared to history. Second, there is simply too much debt in the world. This acts as a brake on growth and also makes both the economy and the financial system fragile to shocks.

“There aren’t many assets that we can get truly excited about. Prices of most financial assets are, in our view, too high to be justified by fundamentals. US inflation-linked bonds, which offer a positive real yield of around 1%, are probably the most attractive major global asset.”

Zehrid Osmani, portfolio manager of Martin Currie Global Portfolio said: “As we continue to look forward, given that we are in the later stage of the longest expansionary economic cycle in the financial markets, there is a growing risk of recession coming up in the next two to three years. For us however, it isn’t so much about whether a recession will happen because it is likely. The more important aspect to reflect on and analyse is what shape the next recession will have; specifically, will it be a shallow or deep recession, and will it be short or long-lasting? Our view is that it will be a short and shallow recession, and therefore there will be an opportunity for long-term investors to increase their exposure to equities in the next growth cycle.”

Why threats warrant active management

Andrew Bell, Chief Executive of Witan said: “Technological disruption to established businesses, central bank tightening and a muted economic cycle continue to argue for a selective approach to picking stocks but the macro backdrop appears less gloomy than the recent market mood implies.”

Craig Baker, CIO at Willis Towers Watson, investment manager of Alliance Trust said: “Policy uncertainty will drive greater variation in industry and stock returns due to the different directional impacts of policy.  Additionally, in the US, late-cycle pressures also increase the importance of company-specific factors, such as margins or leverage. Our outlook for lower stock correlation and rising volatility means that micro factors and active management are becoming more important for the returns from equity investments.”

Uncorrelated investments becoming more important

Dion Di Miceli, head of investment companies at Gravis Capital Management said: “We are living through turbulent times with huge uncertainty hanging over the political and economic world.  Future developments are only likely to increase investor angst over the coming months and years, leaving many searching for fresh ideas that offer non-correlated investments with stable, dependable returns.  At Gravis we believe the investment company structure offers investors access to areas such as infrastructure projects and asset-backed finance, diversifying their portfolio whilst not risking returns.”

Dean Orrico, president of Middlefield International Limited, investment advisor to Middlefield Canadian Income said: “We seem to be entering a period of more modest growth and portfolios should be positioned accordingly. Becoming more defensive by focusing on equity income, real estate, healthcare and energy pipelines is preferable. Central banks globally should consider becoming more dovish so as not to exacerbate the slowdown.”

Pedro Gonzalez de Cosio, CEO of Pharmakon Advisors, investment manager of BioPharma Credit said: “With the outlook for global equity markets increasingly difficult to predict, we believe that investors will appreciate the value of fully-covered income producing assets and alternatives that are uncorrelated to equity price movements. Thankfully, the investment company universe is highly varied and offers a wide variety of high yielding alternative income investments. In general, we expect the more specialist of these vehicles with differentiated investment strategies to have the potential for greater distribution of returns.”

Asset allocation

Mark Whitehead, manager of Securities Trust of Scotland said: “As trade wars, geopolitical tensions and market volatility escalate, it is useful to remind ourselves that high quality, structural dividend growth stocks should offer protection and opportunity as a style, during the last stages of expansion of the economic cycle.”

US remains strong

Katy Thorneycroft, fund manager of JPMorgan Multi-Asset said: “Within equities, we still favour the US and are sceptical of Eurozone stocks. The US has led throughout this cycle and in weak markets this autumn failed to outperform, but we believe the earnings resilience of the US is superior and will be supportive over 2019. By contrast, political woes are simmering once again in Europe, recent earnings seasons were lacklustre at best, and valuations aren’t cheap enough to be compelling. In our view, the same is true in emerging markets, where slower growth and the higher cost of US dollar funding both weigh on the earnings outlook; thus we are marginally underweight emerging market equity.”

Dawn Kendall, managing director at SQN Asset Management, investment adviser to SQN Secured Income Fund said: “Despite wider concerns regarding the style of presidency and the rise of populism globally, business data from the US remains good and the risks to economic development remain benign. The outlook for Europe is less certain and focus will be on financial institutions and their ability to sustain a downturn.  In the medium term, reform of core institutions in this region will be key.  Further afield, the lead will be taken from America and will be determined by trade and dollar strength.  These comments reinforce our opinion that alternative lenders will continue to have a rich pipeline of opportunity as banks in Europe are forced to reassess their risk appetites as focus is once again placed on their balance sheets.”

Technology performance mirroring 2018

Walter Price, fund manager of Allianz Technology said: “As we examine the outlook for technology companies in 2019, we think it may mirror the results in 2018, but in a true mirror image: cross currents and some weakness in the first half, and strength in the second half; the opposite of what we have seen in 2018 for the sector. In summary, we expect a slow start and a strong finish for the technology sector in 2019.”

Attractive valuations in Asia

Dale Nicholls, portfolio manager of Fidelity China Special Situations said: “Investing in China this past year has certainly not been for the faint-hearted as investors have had to deal with volatility, trade wars, and a slowdown in consumption. Of greater concern however is the broader impact on general sentiment and the prospect of delayed investment by Chinese companies in general.

“And yet, despite these concerns, I am buoyed by the fact that growth rates in China remain the envy of most economies. As such, activity in the portfolio has been focused on opportunities that arise during a period of indiscriminate sell-off. In certain companies and sectors such as investment and insurance companies, valuations have dropped to historically low levels that significantly discount their attractive long-term growth prospects.”

Andrew Graham, portfolio manager of Martin Currie Asia Unconstrained said: “Thanks to positive underlying secular trends, Asian equities remain an attractive destination for investors seeking long-term capital and income growth. A near-term slowdown in global economic growth is already partly discounted in share prices and earnings expectations, and valuations have once again come down to attractive levels.”


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  1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 355 members and the industry has total assets of approximately £182 billion.
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