The 2018 con­trar­i­ans who got it right: What they are say­ing now


With just three weeks to go, 2018’s mar­ket con­trar­i­ans are prov­ing pre­scient.

The out­look was de­cid­edly bullish for U.S. stocks and de­vel­op­ing-na­tion as­sets 12 months ago, with both fore­cast to build upon a stel­lar 2017. The beaten-down green­back wasn’t ex­pected to fare any bet­ter in 2018, as a rosy in­ter­na­tional growth out­look threat­ened to lure in­vestors away from Amer­i­can mar­kets. And de­spite some tough talk be­tween the U.S. and China, risks of an all-out trade war were an af­ter­thought.

Not much has gone ac­cord­ing to plan, but DWS, Can­tor Fitzger­ald and Mor­gan Stan­ley were among the few who bet against the trend and got it right. Fed­eral Re­serve rate hikes against a back­drop of sharply es­ca­lat­ing trade ten­sions roiled mar­kets in 2018, pun­ish­ing U.S. stocks and caus­ing risk-averse in­vestors to flee de­vel­op­ing na­tions.

Mean­while, the down-and-out dol­lar has gained against vir­tu­ally all ma­jor cur­ren­cies amid ris­ing rates and buoy­ant U.S. growth.

Here’s what those who called 2018 cor­rectly ex­pect in the new year:

Stalling dol­lar

Ste­fanie Holtze-Jen, chief cur­rency strate­gist at as­set man­ager DWS, is among the vin­di­cated.

In Fe­bru­ary, af­ter the dol­lar’s worst an­nual slide in 14 years, she called for the green­back to strengthen to $1.15 per euro by March 2019, from the pre­vail­ing level of about $1.23. The ar­gu­ment that the U.S.’s twin deficits would de­press the dol­lar was over-hyped, ac­cord­ing to Holtze-Jen, who saw ex­treme bear­ish po­si­tion­ing set­ting up a re­bound.

The dol­lar’s rally start­ing in mid-April proved her right — in­flict­ing pain on global in­vestors. But Holtze-Jen doesn’t ex­pect an­other strong year for the green­back. She sees the euro end­ing next year at $1.15 as slow­ing growth and Euro­pean political woes weigh on the com­mon cur­rency, while the Fed ap­proaches the end of its hik­ing cy­cle. Ex­pec­ta­tions for Fed rate in­creases have crum­bled, with mar­kets now pric­ing in less than a quar­ter­point of tight­en­ing in 2019.

Most fore­cast­ers ex­pect the euro-dol­lar pair to reach $1.20 by the end of 2019, ac­cord­ing to a Bloomberg sur­vey, from about $1.14 now.

“The Fed has come back from au­topi­lot,” said Holtze-Jen. “Their calls will be more data-de­pen­dent. That’s some­thing that takes the nee­dle lower on the dol­lar go­ing for­ward.”

US eq­ui­ties gloom

When it comes to U.S. stocks, 2018’s bears are still scep­ti­cal. For months, Can­tor Fitzger­ald’s Peter Cec­chini has fore­cast the S&P 500 to fin­ish the year at 2,805, one of the more bear­ish pro­jec­tions among Wall Street’s strate­gists, and al­most 7 per­cent above Fri­day’s close.

A de­cel­er­a­tion in U.S. growth, driven in part by higher fund­ing costs on tighter fi­nan­cial con­di­tions, and a frothy com­mer­cial and in­dus­trial loan mar­ket will cre­ate credit stress next year, ac­cord­ing to Cec­chini.

“Our dis­po­si­tion to­wards eq­ui­ties has moved from buy-the-dip to sell-the-rally,” said Cec­chini, Can­tor’s chief global mar­ket strate­gist. “If I’m not con­struc­tive on the credit mar­kets, then I won’t be con­struc­tive on the eq­uity mar­kets.”

He has com­pany in his pes­simism. Mor­gan Stan­ley’s Mike Wil­son, the big­gest eq­uity bear on Wall Street, fore­cast last month that the S&P 500 will end 2019 at 2,750, the same tar­get he called for this year.

As the fiscal boost from tax cuts wears off and global growth de­cel­er­ates, Wil­son ex­pects a “ma­te­rial” de­cel­er­a­tion in cor­po­rate prof­its.

That’s at odds with what most strate­gists ex­pect. The av­er­age pre­dic­tion as of the end of Novem­ber was for the S&P 500 to climb to 3,056 by the end of next year, ac­cord­ing to 14 fore­casts gath­ered by Bloomberg. It’s the most op­ti­mistic year­a­head call since 2009.

Emerg­ing cheer

Jordi Visser at Weiss Multi-Strat­egy Ad­vis­ers, who pre­dicted the peak of the de­vel­op­ing-mar­ket rally in late Jan­uary, ex­pects emerg­ing mar­kets to be a bright spot in 2019 as the dol­lar stum­bles. Visser is call­ing for the iShares MSCI Emerg­ing Mar­kets ETF to out­per­form the S&P 500 In­dex by 15 per­cent to 20 per­cent in 2019. Chi­nese In­ter­net stocks, de­vel­op­ing-na­tion sov­er­eign debt and emerg­ing-mar­ket cur­ren­cies look par­tic­u­larly at­trac­tive.

"Bullish­ness comes from an ex­pec­ta­tion of a weaker dol­lar next year on the back of eas­ier U.S. mone­tary pol­icy, the lag of re­cent Chi­nese stim­u­lus mea­sures and a fo­cus of value as a fac­tor in 2019 rather than growth," said New-York based Visser, chief in­vest­ment of­fi­cer at the $1.7 bil­lion hedge fund.

Ta­nia Es­cobedo, a strate­gist at RBC Cap­i­tal Mar­kets LLC who cor­rectly called a slide in the Brazil­ian real this year when most of the mar­ket was bullish, now has an­other con­trar­ian call for 2019. She’s wa­ger­ing against the real and go­ing long the Mex­i­can peso. Most in­vestors are op­ti­mistic about Brazil’s in­com­ing gov­ern­ment and con­cerned about the pop­ulist rhetoric from Mex­ico’s An­dres Manuel Lopez Obrador.

There are “pock­ets of value” in emerg­ing mar­kets, in­clud­ing Ar­gentina’s beaten-down cur­rency, Lisa Chua, a New York-based money man­ager at Man GLG, said in an in­ter­view last month.

The firm boasted this year’s top de­vel­op­ing-na­tion debt fund with more than $1 bil­lion un­der man­age­ment, ac­cord­ing to data compiled by Bloomberg.

Trade re­minder

A year ago, Jens Nord­vig at Ex­ante Data LLC was cau­tion­ing that the mar­kets weren’t ad­e­quately priced for a build­ing U.S.- China trade dis­pute, as concern about North Korea’s nu­clear weapons pro­gram gar­nered more at­ten­tion.

Now he ex­pects trade ten­sions will re­main a fo­cal point in 2019, even af­ter the world’s two big­gest economies ap­pear to have reached a ten­ta­tive truce on tar­iffs.

“China will try to de­lay and de­lay, but not give in on the big stuff,” said Nord­vig, Wall Street’s top-ranked cur­rency strate­gist for five years run­ning be­fore found­ing Ex­ante. “By the sec­ond quar­ter, the U.S. will have to de­cide if they agree to some cos­metic con­ces­sions, or whether they are ac­tu­ally ready for a sus­tained trade war.”

Not much has gone ac­cord­ing to plan, but DWS, Can­tor Fitzger­ald and Mor­gan Stan­ley were among the fewwho bet against the trend and got it right


Fed­eral Re­serve rate hikes against a back­drop of sharply es­ca­lat­ing trade ten­sions roiled mar­kets in 2018

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