A Look Ahead to 2019 Shifting Emphasis From Return to Risk
Also Interesting
As 2018 draws to a close, the marketplace has become increasingly littered with yearsin-review and return forecasts for the new calendar year. But forecasting is hard and forecasting market returns for a 12-month period is even harder. In their simplest form, investment markets provide a forum for capital seekers and givers to exchange monies today for the hope or promise of the later return of initial capital plus financial compensation for both risk and the time value of money. Asset prices, therefore, are ultimately a reflection of future cash flows. When those cash flows do not manifest themselves as hoped — or conversely, exceed expectations — the discounting mechanism of capital markets adjusts prices accordingly. Which begs the question, what drives cash flows? In short, we believe there are four material factors: units, price, margin and earnings. How many units will the company sell over the next three to five years? At what price? What will the margin structure look like at maturity? Finally, what will earnings or free cash flow be and how much of that is already reflected by market pricing?
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