Investment industry

Market outlook: what should investors consider in 2020?

Guest authors

Investment managers give their views on the investment challenges, opportunities and trends that lie ahead in 2020, along with some lessons learned from 2019.

2019 was a year that tested investors’ confidence. With ongoing Brexit uncertainty, heightened global tensions and the potential of a trade war between the US and China, some investors were perhaps wary of the increasingly volatile markets. But there are often lessons to be learned from changes in the markets and now, at the start of a new year, many investors are considering what opportunities 2020 could bring.

We asked BlackRock, BNY Mellon Investment and J.P. Morgan Asset Management to share their thoughts on what they think 2020 holds for investors and what we can learn from 2019.

What are some lessons we can learn from 2019?

BlackRock:

  1. Prepare early and prepare well for political events that are already on the horizon (for example Brexit movements and the US presidential election).
  2. Manage risk prudently and in a measured way.
  3. Be patient. Look through noise where possible and don't underestimate the fire power still available to policymakers.
  4. Consider using alternative less volatile investments such as precious metals.

BNY Mellon Investment:

We have a volatile backdrop and one where the investment environment can change quickly. Remaining flexible, dynamic and maintaining perspective is increasingly key to success. We also need to keep an open mind in the context of a rapidly evolving scenario where many measures have been pushed to extreme levels which have seldom been seen before. Equity market price action following the Federal Reserve’s change in its view on interest rates at the beginning of the year has once again underscored the influence of central banks on asset prices.

J.P. Morgan Asset Management:

One of the key lessons of 2019 is that government bonds can still offer robust returns even when the starting yield is low. The euro government bond index yield began the year at 0.9%, a full 2 percentage points lower than the US equivalent, yet delivered similar annual returns, although past performance is not a guarantee of future results. With central banks determined to do whatever it takes to sustain the expansion, we’d caution against trying to fight the Federal Reserve (and the European Central Bank, the Bank of Japan, the Bank of England among others) this year.

What do you view as the main investment challenges of 2020?

BlackRock:

After a year which saw markets underwritten by monetary expansion, reduction in this stimulus and handover from monetary to fiscal policy will be critical in 2020. Meanwhile, the continuation of elevated geopolitical risks in the build-up to the US presidential election will likely see a continuation in periodic spikes in volatility across assets and markets.

Against this backdrop rich valuations across quality and defensive assets will continue to challenge investors. Related to this, increasingly negative yields on safe bonds could lead to a breakdown or moderation of their negative correlation with risky assets and have an impact on their diversification benefit.

BNY Mellon Investment:

While economic indices point to a less negative economic growth outlook for 2020, the rally we’ve seen in equity markets since August 2019 lows has already priced in a lot of good news. Risks include the US presidential election, which could have a meaningful impact on markets, while we’re likely to continue to see a shift away from globalisation and towards protectionism. China, responsible for much of the credit-fuelled boom of the past decade, represents the real wildcard with growth decelerating in that economy, the services Purchasing Managers’ Index (PMI) hovering around a decade low, and stresses in the Chinese banking sector.

J.P. Morgan Asset Management:

The economic map for 2020 is far from clear. Unemployment rates near record lows suggest a global economy that’s very late in the cycle, but there are few other signs of exuberance. Inflation is certainly not suggesting the global economy has reached its limits. If geopolitical tensions linger but don’t re-escalate, we should be facing a slowing rather than stalling global economy this year. But this is a big ‘if’. And valuations across risky assets are considerably less supportive than they were as we entered 2019. Against this backdrop, our asset allocation views are turning gradually more defensive.

What do you see as the main investment opportunities of 2020?

BlackRock:

Despite expensive valuations across equity markets there are pockets of value. Emerging market valuations don’t look expensive compared to their developed peers, nor compared to history. Any significant change in the geopolitical backdrop could drive re-rating. Similarly, the UK now looks likely to find its way through its Brexit impasse and even possibly make long-term decisions about its trade relationship with the European Union. Renewed British economic and currency stability could also benefit a market which has historically depressed valuations. Despite its high valuation, the US market looks likely to continue to outperform given higher local growth dynamics, more room for monetary and fiscal support, as well as comparative resilience.

BNY Mellon Investment:

We continue to see a wealth of investment opportunities, drawing on long-term trends such as the development and adoption of alternative energy sources, efficient infrastructure, technology disruption and the cloud. We believe these themes will ultimately feed through to more attractive growth trajectories for companies. Moreover, in a low return world, the income-generating attributes of investments such as real estate investment trusts (REITs) and local currency emerging market debt are valuable. Finally, focusing on security characteristics, such as strong pricing power, low debt and sound operating models, will improve our odds of successfully navigating a highly distorted financial landscape.

J.P. Morgan Asset Management:

Corporate earnings appear unlikely to accelerate significantly this year, yet central bank action is likely to remain active in limiting the downside for risk assets. We therefore think that investors may wish to consider a neutral allocation to equities but with a defensive tilt through large cap, quality companies. Government bonds still have an important role to play as insurance. While our base case is relatively cautious, if we were to see a resolution to the US-China trade dispute then we see emerging Asia having the most significant upside.

What are the key investment trends you think we’ll see in 2020?

BlackRock:

As global interest rates grind lower, one of the potential investment trends we could see is a strengthening of hunt for alternative income. We could see more demands for (higher) dividend-generating equities and emerging market debt plus high-yield bonds. In addition, alternatives and cash could play larger roles in investors’ portfolios, especially those assets with lower correlations with equities and bonds. Continuing trends in environmental, social and governance (ESG) factors, both regulatory and investor preferences, will very likely continue to drive flows across asset classes despite the market environment.

BNY Mellon Investment:

Trends are likely to be dominated by the US presidential election and there will be a lot of ‘noise’ associated with sectors such as pharmaceuticals, which will be buffeted by issues including drug pricing. Trade relations between China and the US will continue to create market volatility, as well as the ongoing Brexit saga in the UK, adding further fragility. Importantly, ESG issues will be pushed further up the agenda globally and the risks they represent will be viewed as increasingly relevant to investment decisions.

J.P. Morgan Asset Management:

We expect to see an increased focus on sustainability within the investment community. Investors are increasingly interested in how their money is being put to work, while numerous sustainability issues are high on policymakers’ agendas. The changes in regulations and policy that could ensue have the potential for far-reaching effects on asset valuations. We expect that ESG-integrated strategies, in which the information is available and evaluated alongside other traditional financial metrics, will move from the exception to the norm in many investors’ expectations.

 

The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your client’s investment can go down as well as up and may be worth less than you paid in. Past performance is not a guarantee of future results.

This information has been provided by Rafael Iborra from BlackRock’s Multi Asset Strategies Group, BNY Mellon Investment’s Real Return Team and J.P. Morgan Asset Management’s UK Market Insights Team based on their understanding in January 2020.