The obligatory disclaimer used by fund managers saying that “past performance is no indicator of future performance” could also be said to apply to predictions based on what happened last year occurring again next year. However, with President Trump into his third year of office in the USA and a federal election due in Australia, I think 2019 could look a little like 2018 in regard to the lessons investors should consider.  

Here is my take on four key lessons from 2018.

1. President Trump sets the tone

Whether you love him or loathe him, there is no doubt that President Trump is the biggest single influence on world stock markets. Maybe because he is a maverick, unconventional or as some would say erratic, he wields more power over the markets than any of his predecessors.

Consider these actions since he came to office:

·      The huge cut in company tax rates, which propelled US and many other global stock markets to all-time highs. US company earnings grew at over 20% pa, consumer confidence and spending lifted as companies shared some of the largesse with their staff by paying  across the board bonuses, and the US dollar strengthened as monies were repatriated. The US economy went into overdrive;

·      The sabre rattling about North Korea, which had markets on edge for months until Donald pulled off a summit with President Kim Jon Un;

·      The trade spat with China and imposition of tariffs (initially 10% on about US$253bn of Chinese goods). Trump has threatened to lift the rate to 25% and impose tariffs on the remaining US$267bn of Chinese exports to the USA. While  these new measures are on hold for 90 days, the development of a trade war remains the biggest single threat to global growth and the continuation of the global equity bull market;

·      The bullying of Saudi Arabia and other OPEC members to increase oil production, which was one of the drivers for the sharp drop in the oil price from almost US$75 per barrel in late September to US$50 a barrel in November; and

·      More bullying, this time about the pace and extent of the increase in US interest rates, with Trump becoming a critic of US Federal Reserve Chair Jerome Powell.  Interestingly, Powell has recently switched tack and now says that US rates are “just below neutral”.

2019 will be Trump’s third year in office. Notwithstanding that his party has lost control of the Congress, Trump is likely to be just as influential on world stock markets in 2019 as he was in 2018. Watch Trump’s actions.

2. Government Intervention is increasing and is a major investor risk

I, like many others, didn’t believe that there was a need for a Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry. I got this wrong.

I also got wrong the impact it would have on the share prices of the four major banks and the AMP.

Almost out of the blue, the Morrison Government initiated a Royal Commission into Aged Care Quality and Safety. It is due to provide an interim report by 31 October 2019, and its final report no later than 30 April 2020. ASX listed companies in this sector, including Estia Health, Regis Healthcare and Japara HealthCare saw their share prices tank following the announcement.

Now, the Government is looking at energy companies and discussing legislation that may  force the divestiture of key power station assets. Described by some as “Venezuelan-style intervention”, it is partly in response to AGL’s woeful mishandling of the Liddell Power Station closure.

The common theme is that Government, in response to legitimate community concerns and the demonstrable success of the banking Royal Commission, is starting to take a more interventionist position in how industries and companies operate. This has particular risks for share investors. In the lead up to an election where “populist policies” are sure to get a run, and a change of government is almost certain, this is not going to go away. If anything, expect to hear more calls for “intervention” or “enquiries” in 2019.

3. The top 20 outperformed

This will surprise many, but the top 20 stocks on the ASX have outperformed the rest of the market in 2018. For the 11 months to 30 November, the ASX 200 has, after taking dividends into account and looking at total shareholder returns, delivered a return of  -2.7%. The top 20 has returned -1.2%.

While both are negative numbers and the difference is only small, it is somewhat remarkable given that the top 20 comprises Commonwealth Bank in first place by market weighting, Westpac in third position, ANZ in fifth position and the NAB in sixth position. Another poor performer, Telstra, is in tenth position. The power of dividends.

With the public hearings of the Royal Commission over, and a glut of special dividends/off market buybacks to come ahead of Bill Shorten becoming Australia’s thirty first Prime Minister, I expect this outperformance to continue in 2019. 

4. All crazes come to an end

Finally, a statement about the obvious – all crazes come to an end. They always seem to go on a bit longer than you expect, but when the bubble bursts, it does so with a bang. That’s the case with Bitcoin. I couldn’t understand why any “rational” person would pay more than the cost to mine a bitcoin of about US$3,000, watched it trade all the way up to almost US$20,000 just before Christmas last year, before plummeting all the way back down. Yesterday, it was around US$3,830.

Bitcoin (USD) - Coinbase

Source: CNBC

I can’t tell you yet what the “craze” of 2019 will be – but there will be something, there always is! For traders, the story will be about knowing when to jump off the bus and leave something for the next punter.