Q What is your outlook for 2020?
Looking back over 2019, we have experienced negative economic and geopolitical news flow throughout the year. At the same time, earnings expectations have been revised lower and growth rates have slowed across most, if not all, regions and sectors. It is not surprising, therefore, that it would be a struggle to find a market observer without a cautious attitude going into 2020.
Despite this backdrop, global equity markets have performed well and are breaking new highs. It appears then that markets are betting on the low interest rate environment to continue and for growth to improve, or at least stabilise, as we move into the new year. In our view, for global equity markets to advance in a more meaningful manner from current levels, we are certainly going to have to see more positive revisions in earnings estimates.
Q Given these lofty valuations, what are the risks and opportunities?
For the past 18 months at least, investor appetite has been focused on safety and growth stability on both a regional and sector level. This has created extreme divergence in the performance between more defensive sectors and the economically sensitive parts of the market. Whether that is at a regional level, such as European equities or emerging markets, or at a sector level, within the energy and consumer discretionary sectors for example, these value areas are trading at very deep discounts relative to their own history.
The cyclical areas of the market therefore appear significantly less crowded. Going into 2020, these are a fertile hunting ground for opportunities, with meaningful outperformance potential should the growth outlook and sentiment improve. What we would like to see though is signs of the rate of earnings downgrades flattening out before we significantly add more exposure. In our view, it would be unwise to gear ourselves further into more defensive trades. We believe that risk lies in those areas that are perceived to be stable and safe, but where earnings aren’t immune to the slowing growth environment.
Q What are the prospects on a regional level in 2020?
The broader economic backdrop over the 12-18 months has weighed more on company earnings outside the US, including Europe, the UK, Asia and emerging markets. In our view, this is because those areas tend to be more sensitive to global trade. However, there are some tentative signs of these regions catching up. For example, there are some indications that China’s economy is bottoming out. Going into 2020, I can see our global portfolios continuing to transition away from markets which have done extraordinarily well, such as North America, to regions evidencing value such as Asia and emerging markets, particularly China.
Q Where are the potential opportunities within particular sectors?
For us, our focus is on bottom-up stock-picking and assessing the relative opportunities within sectors that might present themselves as part of this analysis. We don’t tend to take radical bets on industries, regions or currencies.
Given that we have seen broad-based defensive or growth leadership, we believe the opportunities in 2020 and beyond will lie in the more cyclical areas of the market. For example, looking at the biggest sector within the global universe – information technology – we have had significant overweight positions in some of the software names. Moreover, some payment processors have performed spectacularly well and are now trading at over 20 times on a price-to-earnings basis. We have moved more into the semiconductor space, which tends to be more cyclical and where value can be found while signs are emerging of a recovery. One could also uncover value within materials, energy and industrials, and those are the stock-specific ideas that we will be hunting for as we move into next year.
Regardless of the market preference for particular investment styles, we maintain a disciplined process that looks to invest in high quality, attractively valued companies with improving operating performance and which are receiving increasing investor attention.
Emerging Markets: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss.