Investment Views

28.01.2020
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January 2020

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

Investment Views for Jan 2020

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

We continue to favour global equities over other asset classes. Central bank easing was the major driver of markets in 2019 and offset the potential impact of rising global trade tensions. But with the anticipated diminishing effectiveness of central banks’ current policies, an uptick in growth is now required to be the key support for markets as we enter this new year. Although global growth eased in Q4 2019, business surveys through December and into January suggest that global growth may be ‘bottoming out’. Certainly, there are some early signs of recovery in manufacturing as well as a pick-up in global trade activity. Consumer spending remains resilient and although some data points to a reduction in consumer confidence, it remains at a relatively high level. Nevertheless, it could be well into 2020 before we see growth recovering and, even then, the pace of recovery is likely to be slow and spread unevenly across regions. At current market valuations we expect more modest returns this year and geopolitical headwinds will continue to lead to episodic bouts of volatility. At present, the potential impact of the coronavirus outbreak is the focus of investor minds.

Fixed Interest

We expect central banks to keep their policies largely on hold in the short term, despite a slightly improving growth outlook and even as inflation firms. This reflects a desire to see the global economy re-establish a solid foundation after the recession worries voiced in 2019. Government bond yields outside of the US, especially in Europe and Japan, are at such low levels that they are likely to prove less effective as a stabiliser in portfolios; bonds prices could be vulnerable if growth were to slow whilst inflation builds. A goldilocks outlook would be a growth-supportive policy with little inflationary pressure and an expansion of credit. The higher yields offered by corporate bonds make this asset sub-class relatively more attractive than sovereign bonds. However, some investment grade debt is expensive, and the higher yields on offer from lower quality bonds merit further consideration if growth picks up.

Property

The returns from real estate have been reasonably strong over recent years, and especially in 2019. But prices may now be looking a little stretched and this should dampen returns if global growth were to flat line around current levels. The lateness of the cycle means that the sector risks are higher and those sectors that are benefitting from long-term structural trends are favoured. In the UK, except for the retail sector, commercial property performed well in 2019, exceeding the return from government bonds. Nevertheless, Brexit-related uncertainty significantly reduced investor interest and despite some now increased political stability the UK will face headwinds in 2020 even though the longer-term outlook remains attractive. For this reason, we believe that superior opportunities lie in the equity markets.

Alternatives

Industrial commodities – better news on US-China trade relations has buoyed demand for industrial metals but the coronavirus outbreak has made the short-term global growth outlook uncertain.

Oil – prices strengthened on the back of OPEC’s decision to cut production targets and new maritime regulations will impact demand. However, the coronavirus outbreak and the uncertain impact on economic growth expectations have caused a recent softening.

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.

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 lower but continued 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

The December general election result, which returned the Conservative party with a substantial majority, created a turning point for the UK economy by reducing uncertainty. GDP growth is expected to rise this year and next, although an increase in business investment may be held back until the future UK-EU trading relationship is finalised - we expect negotiations to go right to the wire on 31 December 2020 and even then some kind of fudge is likely. Consequently, the improvement in growth is most likely to come from fiscal policy as government spending increases.

US

The risk of a recession has faded although growth is expected to continue to slow. But if the ‘phase one’ trade deal with China holds, and the likelihood of a ‘progressive’ Democratic presidential candidate winning the party’s nomination begins to fade, business investment is likely to pick up, aided by the tailwind from looser financial conditions. The labour market continues to remain relatively robust and both consumer confidence and the savings rate are high - together these are expected to underpin growth. With interest rates likely 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

With growth in the region expected to remain sluggish this year, keeping core inflation low, there may well be further loosening of policy by the European Central Bank. The latest surveys still highlight weak export demand and so it may be towards the second half of the year before the impact of any uptick in the global economy starts to have a positive benefit. Household consumption remains relatively buoyant but is expected to lose momentum. Inflation may rise a little but the general weakness in economic activity means that the underlying price pressures should remain low. The ECB has announced a strategic review of the region’s economy but any changes are unlikely to materialise until the end the year and so the ECB is expected to keep policy loose. The outlook remains uncertain with the region’s internal politics, Brexit and the possibility of US tariffs on exports as headwinds.

Japan

The 2020 GDP growth outlook remains disappointingly low. Despite this, the Bank of Japan is expected to keep interest rates unchanged as fears of a global recession recede, and the fiscal stimulus package announced in December 2019 is likely to simply offset the unwinding of previous stimulus measures. Consumer spending retreated slightly after the October 2019 tax hike and is expected to remain relatively flat throughout 2020. Although business investment relative to output has been high, falling corporate profits and weaker confidence points to a slowdown. It is hoped that the forthcoming Olympic Games will provide a boost to economic growth. We continue to favour the domestic economy over the exporting companies.

Asia Pacific and Emerging Markets

China’s economy is expected to slow further as the coronavirus emerges as a new threat. The signing of the ‘phase one’ trade deal with the US removes, for now, the risk of further tariff escalation but is unlikely to boost growth as the US tariffs remain high and cooling global demand has weakened Chinese exports. Somewhat inevitably, what happens in China impacts greatly on other Emerging Asia economies, and so growth here in 2020 is expected to be subdued unless global demand picks up significantly. Increased domestic policy support is expected to provide some boost to growth. Despite the ‘phase one’ trade deal US tariffs remain on Chinese imports and this is expected to continue to benefit other parts of Asia whose exports have been re-routed and following a re-configuration of supply chains. Although the economies of Latin American countries are expected to strengthen in 2020 the region is expected to perform poorer than other emerging markets such as those in Asia. A more accommodative Fed is a catalyst for emerging markets as it helps to avoid capital flight in search of higher yields.

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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