The potential for inflation shocks and stock market corrections top the investment agenda this month, with our expert wealth managers plotting careful - yet innovative - courses for their clients’ portfolios.
The expected end to US-Chinese trade hostilities has lessened fears of a recession hitting this year, with sentiment further improved by the UK’s new political certainty. But geopolitical risks do still linger on in trade tussles, Brexit and much more besides. Here are the key themes to consider, according to the wealth management experts on our panel.
Investors urged to consider neglected situations and new investment ideas
Markets look forward to a resolution to Chinese-US trade tensions
Government stimulus and the manufacturing cycle must be watched carefully
Steady central bank interest rates set to support asset prices globally
Inflation expectations could mean ten-year Treasury yields ratchet up this year
It is encouraging to begin the year on a more secure footing than at the same time last year. Markets are already viewing “Phase One” of a trade pact between the US and China as helping to lift manufacturing activity and lessening the likelihood of a recession in 2020; whilst in the UK, the Conservatives’ convincing win has finally unlocked the Brexit impasse and allowed the agenda to move forward after months of political bickering. Things are far from sorted on several fronts, but we start the new year with slightly more optimism and less uncertainty than that which prevailed for the latter part of 2019.
Like the renowned 1970s’ Heineken advert, the improved UK backdrop following the General Election seems to have refreshed the parts of the market that other initiatives couldn’t reach. This has given us more confidence to invest in those areas that stand to benefit most from the reduction in uncertainty and which also offer good value. We have therefore taken the opportunity to move away from our previous general neutral stock market stance by increasing our UK allocation.
There are neglected situations and new investment opportunities being revealed that are worthy of consideration, particularly in this current weather window where the investment skies are, for the moment, looking a little brighter
Specifically, we have targeted domestically-orientated smaller and mid-sized companies via an active fund with an above-average dividend yield. Even for more growth-seeking clients we feel that introducing an income overlay adds an extra dimension of return and a “quality” discipline, both of which can be useful during more volatile market periods.
There will be a need to remain vigilant during 2020, and we should perhaps expect returns to be more modest this coming year compared to last. But as things currently stand, there are neglected situations and new investment opportunities being revealed that are worthy of consideration, particularly in this current weather window where the investment skies are, for the moment, looking a little brighter.
Chief Investment Officer at Bordier UK
The discussions have been going on for two years, but China and the US are likely to de-escalate the issue of their trade war, lowering the levels of rhetoric. This is for two key reasons: Donald Trump faces an election, while Xi Jinping needs Chinese economic growth to improve.
For Trump, an agreement would result in positive market data and his chances of re-election would likely increase, not least as he seems to get the most brownie points from US voters for his handling of the economy (albeit limited brownie points for anything else). The longest bull market in history isn’t just continuing – it’s doing so at a time of low levels of unemployment, which have been cited as at the lowest average than under any other presidency.
For the Chinese, the end of the trade war would mean better export numbers, which would improve the economic numbers. Perhaps just as importantly, however, the Chinese would also like to see Trump re-elected – better the devil you know
For the Chinese, the end of the trade war would mean better export numbers, which would improve the economic numbers. Perhaps just as importantly, however, the Chinese would also like to see Trump re-elected – better the devil you know. While it looks somewhat less likely that Elizabeth Warren will be elected, the Chinese would far rather see Trump in power than someone who is big on human rights and the environment. Joe Biden is also unlikely to be viewed favourably given his previous statements that he would enlist support from other trading nations to negotiate changes to trade.
China particularly needs to see external growth due to its domestic issues – the swine fever outbreaks that fuelled inflation and hit consumer spending are still biting.
Markets believe an end is in sight too. Hence the headlines on the rise of the renminbi. Phase One of the trade deal is widely anticipated by markets to be formally ratified later this month. There are also talks of Trump travelling to China to begin Phase Two of the talks, although a date for these has yet to be confirmed.
Head of Investments at Nedbank Private Wealth
An improved political landscape has prompted a sharp uptick in enquiries, confirming that investors are now ready to put their capital to work. Yet significant risks do still remain that make discernment in investment as vital as ever. Intelligent asset allocation is the key to maximising returns and minimising risks, so why not discuss what yours should look like with a professional, via our 3-minute search?
The bull market will soon be entering its twelfth year, but quantitative easing continues to drive markets upwards. Central banks are waiting for significant inflation signs before closing the tap. So, the punch bowl is not empty yet and the prolonged equity party continues.
Meanwhile, Trump and Johnson have delivered some resolutions for the New Year. The Phase One trade deal with China should help resolve a dispute that has weighed on global growth. That should give a boost to the US economy, where the consumer is already strong, with wages rising and unemployment low.
Of course, markets anticipate good news, so the question is how much of this is priced in? The earning season has just started and we will watch results – and management guidance – closely.
Unsurprisingly, stocks with growth characteristics are well valued, but there are pockets of opportunity
Risks remain. The biggest is the US election. Trump needs markets firing on all cylinders, economic data to remain healthy and even improve, and victory over China rather than ignominious retreat.
Closer to home, Boris Johnson’s triumph has injected some vitality into the UK economy. The spectre of Brexit uncertainty is not vanquished, though.
This remains a low-growth world. Unsurprisingly, stocks with growth characteristics are well valued, but there are pockets of opportunity. Fixed interest is still overpriced, and we see it as a diversifying asset only.
Emerging Markets, Japan and Europe could be good places for equity capital if global growth rebounds. Much depends on government stimulus and the manufacturing cycle.
As parties go, this one still remains in full swing.
Portfolio Manager at James Hambro & Partners
Investors began the year in a buoyant mood, but recent events serve as a sharp reminder of geopolitical risks – gold and oil rose sharply in the aftermath of the US-Iran spat, but gains were short-lived as equity markets remained unperturbed.
In 2020, we expect a modest improvement in global economic growth aided by the de-escalation in the US-China trade tensions along with supportive policies out of the White House (it is an election year after all).
Sterling and the UK equity market reacted positively to the UK General Election, but have begun to wane as focus turns to the very short timeline within which significant Brexit details must be finalised.
With regards to the major central banks, we expect many will keep interest rates on hold, which should support asset prices globally
With regards to the major central banks, we expect many will keep interest rates on hold, which should support asset prices globally.
Looking forward, all eyes will be on US corporate earnings and the new leader of the European Central Bank as investors ask, “Can she help improve European sentiment”?
Director, Investment Management, at Arbuthnot Latham & Co., Limited
Following the festive period your inbox will have been inundated with market outlooks for the coming year. These are usually best viewed in twelve months’ time, as a good reminder of how futile it is to make short-term market predictions. Unfortunately, markets are volatile and rarely deliver what they say on the tin.
Take the S&P 500, which has an annualised return of around 10% over the last 93 years. You might expect the annual returns to cluster around this figure, but that is not the case. In fact, the S&P 500’s annual return has only been within 2% of that 10% figure on six occasions in 93 years. Anyone predicting 10% returns is more likely to be wrong than right!
There was plenty of news to keep markets supported into year-end. This included a Tory landslide in the UK Parliamentary elections, further progress on Phase One of the trade deal between the US and China, and better than expected industrial production data from China. Markets also remained optimistic about a vote in the US House of Representatives on a new free trade agreement between the US, Canada and Mexico, which was finally passed on 19 December.
With all this good news, it was no surprise that the US ten-year yield moved higher. It ended the month at 1.90%, and with inflation expectations starting to increase in the US, we could see this rise further in 2020
Most investors welcomed a more subdued December. It wasn’t quite a Santa Rally but all major equity markets ended the month higher with emerging market equity performing particularly well, returning over 5%.
With all this good news, it was no surprise that the US ten-year yield moved higher. It ended the month at 1.90%, and with inflation expectations starting to increase in the US, we could see this rise further in 2020.
Investment Strategist at Seven Investment Management
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
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