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Investment views

2020 Investment Views and solutions

7 January 2020

Our Multi-Asset team's 2020 investment outlook and themes, and possible investment solutions.

1. Normality postponed

Eleven years into the recovery and monetary policy remains abnormal, and this is not likely to change any time soon.

However, the global consumer remains resilient, offsetting weakness in the manufacturing sector. This should pave the way for a rebound in industrial production as the global inventory cycle swings back into positive territory.

We expect the late-cycle relief rally to continue into 2020 as industrial production rebounds and recession risks recede.

Whilst the clouded macro backdrop has helped reduce some of the tail risks that have dominated headlines for months, including the potential for a very damaging outcome from the US-China trade dispute and a ‘hard’ Brexit, they inevitably persist. For instance, the US presidential race may lead to greater-than-usual domestic US policy uncertainty next year.

Possible investment solution

2. US-China dispute: accelerating China’s transition

US pressure is playing into the hands of Beijing’s reformers, who are accelerating plans to open China’s capital markets and introduce stronger intellectual property protections, among other initiatives. In the key battleground of technology, US moves against China are fuelling a drive for greater technological self-reliance.

Possible investment solution

3. Europe and beyond

There should be at least a temporary spur to the European economy driven by a relaxation of fiscal constraints and the adoption of a pan-eurozone industrial policy centred around accelerating the region’s energy transition to renewables. This could surprise consensus expectations of continued sluggish growth and reduce the reliance on extreme monetary policy.

The increasing awareness of the need for adopting climate change measures, supported by shifting economics in favour of renewable energy, should lead to continued outperformance by companies throughout the world driving the transition to a low carbon world.

Possible investment solution

4. Equity rotation from US to ex-US; from defensives to cyclicals

2020 may be the year that US equity dominance finally falters.

As macro uncertainty moderates, trends in equity markets could reverse, with investors shifting back towards cyclical stocks.

Possible investment solution

5. Building strategic exposure in Asia

The difference in valuations between Asia equities and US equities is at a level that has historically been associated with protracted periods of outperformance for more moderately valued stocks.

Asian equity markets represent a great hunting ground for active investors. Asia’s superior growth rate is not, of itself, a sufficient reason to tilt allocations eastwards. But in a growth-starved world, the structural trend of the growing power of the Asian consumer is set to remain one of the dominant investment themes of our times.

Possible investment solution

6. Fixed income: Yield curves on the up and not all credits are created equal

With global growth likely to revive and central banks on course to keep short-term interest rates low, yield curves should steepen.

After a good year, credit should deliver reasonable, albeit lower, performance in a low-yield world. Fundamentally, companies remain in decent shape. If the global economy holds up, as we believe it will, default rates should remain low and consequently credit quality should remain solidly underpinned. But bottom-up selectivity will remain paramount.

Possible investment solution

7. Emerging relief

The US dollar may correct from the position of strength it has sustained for several years, relieving pressure on emerging market currencies.

We also believe that despite the headline noise, most emerging markets will continue to consolidate the macroeconomic stability gains they have made over the last few years.

Possible investment solution

8. Gold could be a valuable diversifier

With bonds likely to offer poor defensive properties, gold is a strong contender to fulfil this role.

Supporting gold demand, central banks in many countries are showing a renewed interest in accumulating gold reserves instead of US Treasuries.

After years of restructuring and balance-sheet improvement, a good number of gold producers are in robust financial health and well-placed to generate sustainable returns at prices well below current levels.

Possible investment solution

Investment carries the risk of capital loss.

1 ‘Best ideas’ represents our highest conviction ideas following fundamental analysis.
2 The portfolio may change significantly over a short period of time. As at 31 October 2019.

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