An update on the 10 events that could surprise markets in 2019 (plus a new one)

Tony Sutton

Sintra Capital

It has been two months since we published our list of 10 potential surprises for 2019, which on the balance of probabilities, are unlikely to happen but shouldn’t be written off entirely. A lot has changed since then and here we provide an update plus a new surprise.

1) Australian house prices to stabilise

The Royal Commission is over, the final report has been released and banks came away faring significantly better than most commentators’ dire predictions. With seemingly clear skies ahead, a relaxing of credit could help stem any further deterioration in house prices.

Update: According to CoreLogic, who calculate a daily home value index, 2019 calendar year-to-date prices have continued to decline in aggregate across the five major capital cities, with the rate of decline accelerating to -3.2%, down from -2.9% in the fourth quarter of 2018.

We might have been a bit early with this prediction, however recent commentary from the major banks, particularly ANZ, regarding the loosening of credit criteria and willingness to lend, suggests that our underlying thesis remains intact.

2) A second Brexit referendum and 3) A result that votes to remain

The current state of play around Brexit is a complete mess, with the full effects still largely unknown. The UK people are slowly realising this and enough of them will vote to remain at a second referendum, sparking a Re-Brentry to the EU.

Update: Our prediction remains very much ‘in play’. The mess that is Brexit has been kicked further down the road to 31 October 2019 – which coincides with Halloween – the ‘Nightmare on Downing Street’! The British government is committed to leave the EU pending an agreed deal, however there is no certainty that Theresa May will be Prime Minister and is a long way off a united parliament.

To add to complications, the pending EU parliamentary elections are on 1 June – and if the UK decides NOT to participate, they will immediately leave the EU with ‘no deal’. If they do agree to participate, then a full re-negotiation or second referendum is the most likely outcome and the Re-Brentry complete.

4) Big US Pension Fund deficits spook the market

Little has been written or said about the size of US public and private pension fund deficits in recent times. This is especially surprising amidst persistently low bond yields and gyrating equity markets. Something has to give.

Update: This prediction is a bit of a sleeper. With global bond yields plummeting to deeper lows than when we first went to print, it can only be a matter of time before the size of US pension fund deficits hits the headlines.

5) Ground breaks on a ‘wall’ along the US-Mexico border

Whether by declaration of national emergency or congressional funding approval and after all legal hoops are jumped through, Trump will finally honour a key election promise with construction commencing on ‘The Wall’. Along the way, Trump may have succeeded in politically baiting the Democrats by strategically (although counter-intuitively) waiting until after the mid-term elections to seek his ‘Wall’ funding.

Update: The topic of ‘The Wall’ and border security generally has gone very quiet of late. However, it will almost certainly form part of Trump’s playbook as the 2020 Presidential election approaches. Conveniently, he can blame the Democrats for neglecting national security and failing to act on human suffering.

6) Premier Xi Jinping and President Trump share a warm embrace

Reminiscent of the famous Reykjavik summit between Reagan and Gorbachev, marking a turning point in the Cold War, Trump and Xi have an opportunity to create their own history. With a US-China trade deal stamped, hopefully resulting in a win-win for both sides, the two leaders show ‘strength in unity’ by sharing a symbolic hug.

Update: Trade talks between the US and China have dragged with both sides leaking positive snippets of information along the way to maintain public interest. We can’t help but feel that a resolution (excluding IP issues, which could take years to sort out) is imminent. How Trump and Xi choose to symbolise their union will be closely scrutinised from a body language perspective, with a hug certainly not out of the question.

7) China retreats from One-Belt-One-Road

The Belt & Road Initiative significantly increased China’s direct investment in the ASEAN region. However, with the CNY depreciating versus the USD, funding costs have spiked. China may consequently be forced to slow down or temporarily retreat from its committed ‘Belt & Road’ course, negatively impacting the region’s economic prospects.

Update: China’s One-Belt-One-Road initiative remains a clear pillar of future economic success which the ruling party is very much committed to. So, this prediction is very much a longer shot compared to some of the others. However, as USD funding costs increase and domestic economic growth declines, we may still potentially see a slow-down in China’s appetite for outbound investment.

8) Acceleration in corporate takeover activity

With global GDP expected to slow in 2019/20, corporates may be encouraged by their ‘friendly’ bankers to pursue M&A transactions in the interests of maintaining earnings growth. This will become even more pronounced if talk of taxing share buybacks in America comes into force.

Update: Since the beginning of 2019, a number of large-scale pending M&A transactions have been announced across a range of sectors and geographies. Some of the bigger deals include oil giant Chevron trumped by Occidental’s offer for Anadarko Petroleum, a merger between major gold producers Barrick and Newmont, US managed care providers Centene and WellCare, Wynn’s approach and subsequent retreat from Crown (although we can’t help but think this one remains in play), Samsung/NXP Semiconductors, Fidelity National Information/Worldpay and Nippon Paint willing to pay a 28% premium for Australian paint manufacturer Dulux. This prediction is so far very much on track and our expectation is for the trend to continue, especially while the cost of debt remains low.

9) The US economy accelerates in 2H. US interest rates rise in 4Q. US dollar remains strong

With indicators including the Chicago PMI and industrial production figures falling rapidly, consensus sees a slowing US economy. However, with a more dovish Fed, consumer confidence could quickly bounce back, buoying the US economy and forcing the Fed to change tact again.

Update: We are probably more right than wrong on this one at present. All economic data out of the US remains strong, which is helping to support the USD. The USD Index has recovered to levels last seen in June 2017. However, market expectations based on current bond yields are still pricing a 58.3% probability of at least one rate cut in 2019.

10) Trump throws in the towel on a second term

Despite the fun Trump appears to be having, he may have checked off all items on his presidential bucket list and wants to go out on top. A trade deal with China is sealed, the ‘Wall’ is being built and the economy has held up thus far … But please don’t hold your breath on this one!

Update: Always a long shot given how much he appears to be loving the job. All rhetoric over the past few months seems to be laying the foundations for a successful outcome on “the Tuesday next after the first Monday in the month of November” 2020.

11) New Surprise: Uber to trade more than 20% below IPO price

In the most hotly anticipated IPO of 2019, Uber is seeking to raise approximately US$8bn-$10bn at a valuation in the vicinity of US$90bn. The company lost a staggering US$3bn in 2018, so we won’t concern ourselves with ‘irrelevant’ valuation metrics. Instead, our focus is on total addressable market and according to Uber, this is estimated to be a jaw-dropping US$12 trillion!

However, back to the real world, where competition from the likes of Lyft and Didi among others is increasing and driver dissatisfaction is worsening. To justify such a lofty valuation, revenue needs to be growing exponentially. And it isn’t.

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Tony Sutton
Portfolio Manager
Sintra Capital

Tony has extensive experience in international equities having worked in both London and Australia. Tony was formerly senior portfolio manager and head of international equities at K2 Asset Management (2016-2022). Prior broader market roles...

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