Published: January 10, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources

Our Commentary

Equities

Economies and stock markets most exposed to manufacturing fared best, with China, Asia and Emerging Markets all gaining ground.

Global equities closed the year at new highs on news that the US and China had agreed terms for a partial settlement of their long-running trade dispute.

Although the wide-ranging dispute is far from over and could potentially rumble on for years, stock markets rallied at the prospect of stronger global economic growth and a rise in corporate profits.

Fixed Income

Inevitably, not all assets provided such positive returns.

Fixed interest stocks continued their steady retreat from their summer highs as the prospect of recession diminished and investors sought better value in other assets, primarily equities. Other defensive assets remained out of favour.

Our 2020 Outlook

Building on an upbeat 2019-year end

Financial markets enter 2020 propelled by generally positive expectations for the year ahead and with central banks remaining accommodative.

However, it is not likely to be smooth sailing for investors, given several potentially market-moving events scheduled for this year.

Coming up are the likelihood of the UK’s exit from the European Union at the end of January, US elections in November, and the ongoing US-China trade negotiations. Geopolitical risks also remain heightened in the Middle East, with rumblings in North Korea and Iran under scrutiny.

Global growth underpinned by 2019 central banks

Underpinning financial market fortunes, however, are expectations that growth will be propped up by the comprehensive monetary policy easing that took place across developed and emerging markets last year.

Ongoing mini-quantitative easing operations conducted by the European Central Bank and the US Federal Reserve will continue to add liquidity to the economy.

Most major investment banks are predicting global growth to recover to above-trend levels in 2020 after slowing in the final months of 2019. JP Morgan Research estimates global growth to come in at 2.5%, US growth at 1.7% and emerging market growth at 4.2%. Goldman Sachs is more circumspect but still expects moderately better economic growth. Morgan Stanley expects consumption improvements to propel a mini-recovery with global growth averaging 3.2% in 2020, coming predominantly from emerging markets and, to a lesser degree, an improving outlook in Europe.

US-China trade will remain under the spotlight

The trajectory of the US-China trade negotiations will continue to have a material impact on financial market fortunes. Business sentiment, which was dented by the uncertainty around trade negotiations, should firm as the US and China Phase 1 trade deal is scheduled to be signed in January.

A relatively upbeat outlook for equities

Against this broadly encouraging macro-economic backdrop, the outlook for global equities is relatively upbeat, notwithstanding the significant advances achieved by the asset class during 2019. Gains are, however, not expected to be as substantial as last year.

In the US there is the continuing risk posed by the trade war, and the possibility of the next Congress reversing the 2017 US corporate tax cut. Goldman Sachs forecasts that such a move could see S&P 500 earnings growth in 2021 contract by 7% rather than grow by 5%.

There will be many forces at play during 2020, many of which could well be positive. However, a cautious and considered approach is advisable in navigating the risks and potential challenges that lie ahead.

Portfolio Actions

Although there has been a steady flow of bids for UK businesses and assets by international companies over the past three years, this quarter saw the return of mainstream portfolio investors attracted by low valuation.

This inflow, together with relief over the election outcome saw sterling rise, reducing the translated returns of international assets for sterling-denominated investments.

We continue to look to capitalise on extended short-term relative weakness of defensive sectors and the year ended strongly for our exposure to the utilities sector and to stocks such as Smith & Nephew and Mowi ASA.

We expect emerging markets to be prime beneficiaries of an uptick in global manufacturing, the phase one trade deal and better economic news out of China. With ethical considerations an increasing focus for investors, we are looking to add further exposure to emerging markets, focusing on companies with a socially responsible bias.

Regards,

Euro Pacific Advisors Management Team