Canaccord Genuity boss in the Isle of Man, DERMOT HAMILL, looks at the 2019 investment horizon and big trends coming down the track

In 2018 the world has, once again, embraced fear over greed in this most unloved bull market.

As concerns heighten over Brexit, a potential trade war, the Fed potentially pushing interest rates up and the technology cycle, the markets will continue to be mired in pessimism, until they have some clarity on what will happen on any of these fronts.

In these uncertain times, what do we think will be the ‘big things’ in 2019?

With volatility comes opportunity – some ideas are new, some are tried and tested, but there are still glimmers of hope for investors in 2019.

Here are the themes that will be on our radar next year:

FAANGs to CRAABs

The issue is that although FAANGs (Facebook, Amazon, Apple, Netflix, Google) have performed incredibly over the last five years, there is no doubt they are yesterday’s technologies.

Looking at the technology of the future, we are interested in the CRAABs of this world (cryptocurrency, robotics, artificial intelligence, automation and biotech companies).

We don’t know which companies will dominate the market leaderboard in 10 years’ time, but we do know it’s important not to pay too much attention to short-term transient factors when making long-term allocations.

Rapid technological innovation is propelling changes in all industries, from robotics in healthcare to data analysis in business. CRAABs are in our net for 2019.

Convertible bonds – nerdy and overly complex or worth looking at?

When convertible bonds are mentioned, the reaction of most people is to yawn.

They have a reputation of being a bit geeky and in the realm of mathematicians. But in a time when interest rates are starting to creep up – albeit slowly – and equities are climbing a ‘wall of worry’, they are worth a second look.

Essentially, they are a fixed-rate instrument that can convert into shares at a specific share price.

Therefore, convertibles have an equity correlation and can move with the underlying share price, but also have a ‘bond floor’ (a price below which they can’t fall).

This hybrid makeup shapes convertibles into a flexible and attractive investment vehicle and one we’re examining closely for 2019.

Japan

From being an investors’ graveyard in the nineties and noughties when the Japanese economy was going through a protracted period of stagflation, it is definitely making a comeback.

Although it has one of the most elderly populations in the developed world, the Japanese are cleverly using robotics and artificial intelligence (AI) in innovative ways to tackle the relative shortage of workers.

It is also, surprisingly, the third largest global destination for immigrants.

From an investment point of view, Japanese valuations are much cheaper than its US counterparts.

And their dividend paying ratio is excellent – again, much better than the US.

All of this has been underpinned by Prime Minister Shinzo Abe’s ‘three arrows’ approach to economic reform, including high government spending, almost limitless quantitative easing, measures to boost structural growth and – by far the most important – corporate reform, with a focus on return on equity and shareholder friendliness.

All of which conspire to make Japan a very attractive investment destination.

Fixed income – back in vogue?

Corporate and government bonds are what one traditionally used to provide diversification in a portfolio.

Then the global crisis hit, quantitative easing started pumping cash into failing systems and interest rates hit rock bottom.

Not to mention the sovereign debt crisis.

It’s safe to say bonds have been out of fashion – but lately, we’re starting to see a shift.

When bonds are providing a return of 2% or less, the rule of thumb is to leave well alone.

When US treasuries start to return more than 3%, they will be on our radar once again.

Latin America – more than oil and mining?

We believe the outlook for LatAm is quietly encouraging.

For a start, it has an unusual investment profile compared to the rest of the emerging world. Brazil and Mexico dominate, representing over 84% of the MSCI Latin America Index.

However, together with Argentina (despite its well documented problems), Chile, Peru and Colombia, the economies of these six nations have a combined GDP of nearly US$5 trillion and are on a par economically with Japan.

If the Latin American investment environment is supportive for equity markets in 2019, and an opportunity to introduce an exposure within portfolios presents itself, we will take it.

Environmental, social and governance (ESG) investing

The rise of the principled investor has continued this year, demonstrated by the number of ESG investment vehicles that have emerged.

It’s no longer just about not investing in arms or tobacco companies – these days, investors want assurances the companies they invest in are well governed, steer clear of activity that could damage their reputations and have ethical supply chains.

Until recently, allocating capital was viewed as binary - you had to choose between philanthropy and profit.

Now the industry acknowledges that well-governed companies that put thought into their environmental and social mission can often be the most profitable. ESG will continue to be a key theme in 2019.

With the volatile times likely to continue, 2019 looks set to be another bumpy year for investors.

But staying sharp, resisting fads and remembering that investing in the markets is about investing capital for the long term should ensure investors are as protected as possible as we move into the New Year.