Investment Views

19.12.2019
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December 2019

Here we summarise our Investment Committee's immediate outlook for the primary asset classes and major equity markets.

Investment Views for Dec 2019

  • Positive
  • Neutral
  • Negative
Asset Class Current View Outlook
Equities

We continue to favour equities on a relative basis but expect relatively limited upside in the short term. Certainly, after some weeks of drift, the market has responded favourably to news of the US and China reaching agreement to sign a ‘phase one’ trade deal, and the Conservatives success in the general election has removed a portion of the uncertainty that has dogged businesses and investors. But we are late in the economic cycle and, despite increasing evidence to suggest a ‘bottoming out’ of the downturn in industry, with some growth witnessed in both industrial production and world trade volumes, it could be well into 2020 before we see growth recovering. Even then, the pace of recovery is likely to be slow and spread unevenly across regions. Despite resilient consumer confidence and generally healthy personal balance sheets, several labour market leading indicators point to jobs growth slowing soon, which could begin to damage consumption. Trade wars, the US presidential election and Brexit (still) remain significant headwinds.

Fixed Interest

Although securing a trade deal with the EU by the end of December 2020 presents a significant challenge, the UK can be viewed with a little more optimism than was manifest before the election result. Hopefully this will lead to some increase in business and consumer spending as well as some fiscal stimulus. With limited inflationary pressures it is likely that the Bank of England will keep interest rates unchanged, as will the Fed and the ECB. So monetary policy will continue to be supportive unless there is a material uptick in global growth and inflation. The UK gilt yield curve is likely to gently steepen as it absorbs increased issuance and the effect of an improving UK economy, and although credit spreads are expected to tighten credit remains relatively more attractive than sovereign fixed interest.

Property

The returns from UK commercial property are expected to remain weak as property rental value growth is dragged down by declines in retail rents. In the short term, property yields could rise further given the ongoing Brexit uncertainty and the outlook for the retail sector. But with government bond yields expected to stay low and tepid economic growth, the yields from the office and industrial sectors are likely to be static at best. Listed property securities have enjoyed a very good 2019, and the sectors that have outperformed are those where total returns are generally driven by earnings growth and price appreciation rather than yield. We continue to retain some exposure to global property securities, but this is limited given the weakness in the economic growth outlook and geopolitical risks. We remain cautious, other than on a long-term basis.

Alternatives

Industrial commodities – most metal prices are expected to remain subdued as global growth remains weak and the Chinese economy continues to slow.

Oil – prices will fluctuate on supply and inventory data but are expected to rise slightly from current levels given further supply cuts and reduced demand as the global economy slows.

Gold – periodic bouts of investor uncertainty will see demand for gold’s safe-haven qualities. A softer dollar, given the expectation of a decrease in US interest rates and low bond yields, should also be supportive. However, with strengthening hopes of avoiding a global recession gold’s recent rally may have temporarily runs its course.

Absolute return – offers the potential to dampen volatility and provide some downside protection, but returns are often moderate at best.

Cash

With UK interest rates seemingly on hold and the continuing uncertainty created by Brexit, it is unlikely that yield-hungry depositors will be satisfied in the short-term. Consequently, cash currently serves only as a diversifier, helping to reduce portfolio risk by dampening volatility.

Equity Region Current View Outlook
UK

There has been a marked reaction to the general election result now that the Conservatives have a sizeable and workable majority. The pound has strengthened, gilt yields have moved higher, credit spreads have tightened, and UK equity prices have risen – especially of domestic economy focused companies. Despite the expectation that the UK will now leave the EU on 31 January 2020, there remains considerable uncertainty about what the longer-term trading relationship with the EU will look like, not least because of the limited time available to strike a trade deal. Against a backdrop of a sluggish global economy, it is likely that any rebound in GDP growth will be limited until there is some resolution to the UK’s future trading arrangements.

US

Although US economic growth has peaked the cycle has been extended and the previous talk of recession now seems a distant memory. However, business confidence has weakened resulting in less capital investment, although employment has remained high. Despite an agreement to sign a ‘Phase One’ trade deal with China the trade dispute seems destined to rumble on, and this, together with the possibility of a left-leaning Democrat being elected could stifle business confidence. Meanwhile consumer confidence remains high, with good employment prospects, wages growing and generally lows levels of debt. With interest rates expected to stay low and corporate earnings expected to begin to grow again in 2020 the outlook is positive although already elevated prices may limit an uptick in the equity market.

Europe

The European Commission has downgraded its growth expectations with this year’s growth likely to be the slowest since 2014 and only a marginal increase to 1.2% for 2020. November’s Purchasing Managers’ Composite Index, a leading economic indicator, was again lower, but still managed to remain in expansionary territory, although this masked the significant weakness in the manufacturing sector. Manufacturing, along with consumption, is the bedrock of the European economy, illustrated by relative underperformance of the German economy (a manufacturing hub) compared with France. Inflationary pressures remain absent and the continuation of benign monetary policies and a more constructive fiscal environment provide some support for the markets. However, the outlook remains uncertain with internal politics, Brexit and the possibility of a US tariffs on exports as headwinds.

Japan

October’s increase in the consumption tax slowed domestic demand and contributed to a deceleration in the economy in Q4. Together with weak foreign demand economic growth is forecast to remain low for the foreseeable future. Consequently, the government is expected to provide support in the form of accommodative fiscal policy, and the forthcoming Tokyo Olympic Games will boost tourism helping to boost economic growth. Unless the yen strengthens significantly the Bank of Japan is not expected to ease policy further (unless deemed necessary), especially given mounting concerns over the impact of loose monetary policy on financial stability. We continue to favour the domestic economy over the exporting companies.

Asia Pacific and Emerging Markets

China’s economic growth has steadily decelerated as it transitions to a consumption, services-led economy. Further policy loosening is expected, including a softening of the renminbi, which should provide some stability, but growth is expected to slow further in 2020. An end to the trade conflict with the US is doubtful if China is expected to make major concessions to its overall strategy. A more accommodative Fed is a catalyst for emerging markets as it helps to avoid capital flight in search of higher yields. We prefer selective Asia emerging markets’ equities to Latin American equities which are too closely linked to commodity prices.

Risk warning: Investors should be aware that past performance of investments is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them may fall as well as rise. The content of this bulletin is for general information and reflects the general market view of Parallel Investment Management Ltd. - it should not be interpreted as recommendations or advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.

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