Outlook 2018


‘I made my money by selling too soon’.  Wise words indeed from Bernard Baruch – timing is one of the great investment challenges.  Investors should never get too comfortable. After a year of record highs for global stock markets, we can’t claim to know whether there will be major upsets in 2018. But we do know that there is no room for complacency.

One of the biggest risks for investors – and one of the hardest to avoid – is the assumption that things will stay the same: industry leaders will keep on leading, and market ‘winners’ will keep on winning. But the history of global stock markets is littered with companies that were once the toast of the exchanges and now no longer exist.  Yesterday’s innovations lie on tomorrow’s scrapheap.  In contrast, diamonds in the rough with great potential are left underappreciated and ignored.

The excitement in markets is all too apparent given the hype surrounding Bitcoin and the technology sector in 2018. We’re less interested in debating whether particular asset classes are overly elevated, however, than in avoiding the market’s increasingly complacent attitude to risk. Although it’s impossible to predict when a consensus view will change we can say for certain that many people have become too comfortable about the balance between risk and reward.

To some extent, this is understandable. The world is awash with cheap money, and the curators of this capital are desperate for returns. With so much money looking for a home, risks appear to recede. Symptoms of this excess include the mushrooming of get-rich-quick schemes such as cryptocurrency investments and the fact that the small group of ‘FANG’ stocks (Facebook, Amazon, Netflix and Google) are all viewed as sure-fire winners.

But while these factors may explain some of the current wishful thinking, they certainly don’t justify it. Things can change – and, eventually, they always do. The political environment is never static, new competition can emerge, advances in technology can drive structural change, management can remove their focus on the core business, and apparently successful business models can mask hidden flaws. Meanwhile, business models that appear unsuccessful can evolve and adapt.

All this should be obvious. But innate behavioral biases mean that many investors struggle to see things clearly. We all know that we can’t extrapolate recent performance to assume that it will continue in the future. But human nature is such that many people do look to the recent past and assume it will continue.

None of this is to say that the wider market will fall in 2018. It may well continue to rise. But it’s important to note that the risks being taken in certain areas may not be justified by the returns that those areas will deliver in future.

Given the wide spread of valuations across the market as we enter 2018, we at The Scottish will be doing what we do always: looking for opportunities to generate good long-term returns for shareholders. We’d rather invest in companies for which modest progress can bring outsized rewards than in market darlings with high expectations and a long way to fall. So, we’ll be seeking out unfashionable and unpopular investments with ample room for recovery.

Where do such opportunities lie? At the moment, we are finding some interesting prospects in the oil and retail sectors – areas of the market that have been down so long that many investors can’t see a way up. But everything is cyclical: what goes up must come down, and vice versa. We may have to be patient, and we know that our contrarian stance won’t be comfortable. But we are confident that it is correct.

Alasdair McKinnon, Manager

3 January 2018


Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this promotion should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

This promotion is issued and approved by SIT Savings Limited.