Investment Views

20.02.2020
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February 2020

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

Investment Views for Feb 2020

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

Growth prospects in developed economies began to show signs of improvement in late 2019 and even emerging market economies have begun to show some momentum. But last month’s outbreak of the coronavirus now poses a serious threat to global growth, and the uncertainties around the magnitude and duration of the epidemic make it too simplistic to assume a repeat of the ‘V-shaped’ recovery previously witnessed following similar events. Nevertheless, economists widely believe that the epidemic will delay rather than derail the global economy and expect an uptick later in the year. With the risks of recession having retreated and despite the likely impact of the coronavirus the backdrop for risk assets remains favourable. Consequently, we continue to favour global equities over other asset classes, although we expect frequent periods of heightened volatility.

Fixed Interest

We remain neutral on government bonds given the expectation that central banks will keep their current policies on hold over the coming months. Despite the outbreak of coronavirus, we do not expect to see further loosening of policy except in China and some neighbouring economies, unless it becomes a pandemic. 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, and bond prices generally could be vulnerable if growth were to slow whilst inflation builds. 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, but the higher yields on offer from lower quality bonds merit further consideration if growth picks up.

Property

The outlook for returns from UK commercial property looks set to be weak as all property rental growth is likely to be dragged down by the decline in retail rents. The poor prospects for the retail sector together with the ongoing uncertainty over the UK’s future relationship with the EU will continue to act as a drag. In the eurozone, low government bond yields will have a depressive effect on the yields from prime offices and industrial premises, whilst the retail sector suffers from the same issues as the UK. Although we are positive over the long-term outlook for the asset class, we consider that equity markets currently present better rewards.

Alternatives

Industrial commodities – with China the largest consumer of industrial metals, prices have plunged on demand fears caused by the coronavirus outbreak. Until the magnitude and duration of the epidemic are known prices are likely to remain low.

Oil – if the coronavirus is soon contained and China’s economy begins to recover demand for oil will increase stimulating upward pressure on prices, as will wider global growth as the year progresses.

Gold – periodic bouts of investor uncertainty will see demand for gold’s safe-haven qualities, but if the coronavirus epidemic is contained soon and growth starts to pick up demand is expected to fade.

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

Recent survey data is encouraging with rising demand for both manufacturing and services, and an easing in the rate of decline of orders for construction work. Although some political uncertainty has been removed, there is little doubt that the negotiation phase between the UK and the EU over our future trading relationship will be both lengthy and challenging, and any increase in business investment may be held back until the future becomes a little clearer. Nevertheless, GDP growth is expected to rise this year and next, although some of the improvement in growth is most likely to come from fiscal policy as government spending increases.

US

US business activity grew at its fastest rate in January, largely reflecting an uptick in the service sector while the exports element of the manufacturing sector continued to drag. Overall, the US economy is expected to accelerate gradually this year supported by the continuation of loose financial conditions and improved trade relations with China. But with China at the centre of many manufacturing supply chains the impact of the coronavirus is likely to be felt at some point. With the strong labour market and wages likely to underpin growth the outlook remains positive, although already elevated prices may limit the size of any uptick in the equity market. Investors’ eyes will increasingly look to the forthcoming presidential election for clues to what might upset the markets, but if Trump is re-elected it is likely that he will seek to install a dovish candidate at the Fed.

Europe

Recent survey data points to an improved outlook as manufacturing stabilises and the services sector remains relatively resilient; despite this, output growth is expected to remain subdued. Firms face the headwinds of the possibility of a trade war with the US, the uncertainty surrounding Brexit, and now the impact of the coronavirus on supply chains, especially Germany’s export market with China. Slow growth will keep inflation below target and the ECB will remain accommodative and may apply further stimulus. Regional politics are also unlikely to be very far from the headlines.

Japan

The survey data in Q4 2019 pointed to the steepest downturn in Japan’s economy for 3 years and so it should be no surprise that the economy shrank by 6.3% y/y in the last quarter. Despite recent data pointing to an improved outlook we expect the economy to remain sluggish in 2020. Although the Bank of Japan is expected to remain accommodative there is little expectation of a deepening of its support. Although the Japanese economy should benefit from any recovery in global manufacturing, as well as a lull in the US-China trade tensions, the coronavirus has likely pushed back the date to later in the year.

Asia Pacific and Emerging Markets

China’s economy was continuing to weaken even before the coronavirus outbreak, but this event has made the near-term outlook uncertain. The measures taken to try to contain the virus will weigh heavily on growth in Q1 and possibly beyond that depending on how the virus spreads. Some economists predict that growth will fall by as much as half this year. In any event, we expect the People’s Bank of China to loosen policy further to stimulate the economy. China’s involvement in the global supply chains will impact many countries, especially those in close geographic proximity as well as those operating in the tourism, technology, electronics and manufacturing sectors. However, once the outbreak is brought under control, we expect economic growth to rebound strongly. Growth across Latin America is expected to strengthen in 2020 but we consider other emerging markets such as those in Asia offer greater potential.

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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