What are the most pressing issues facing investors globally? Our asset class heads give their views on the Equities, Fixed Income and Alternatives themes to watch in the year ahead.
EQUITIES
Company valuations, overall, hit record highs in 2019 even as geopolitical uncertainty led to heightened share price movements. We believe swings in sentiment could continue in 2020 and that a focus on company fundamentals will be more important than ever.
Weigh the Risks
Can equity markets go higher? We think geopolitics will have an outsized impact on the answer. We also recognise that valuations are above long-term averages and some economic indicators are turning negative. But there are positive off sets: loosening monetary policy such as interest rate cuts by many central banks, a strong US labour market and the relative attractiveness of stocks to bonds. We think the equity train stays on the tracks but with bumps ahead.
US Unemployment Rate
50-Year low of 3.5% in 20191
Valuations Matter
For much of 2019, investors rewarded defensive stocks, but September saw a sharp rotation to overlooked cyclical companies, which are sensitive to changes in the economy. Did this shift in sentiment suggest that investors will no longer pay any price for “safety?” Such scepticism is prudent, and for 2020 we think it is critical to identify companies with sound fundamentals trading on attractive valuations.
Go Global
We believe investors should diversify geographically. US stocks led global equities in 2019.2 In 2020, we believe this leadership could expand to regions such as Europe, on which sentiment has been particularly negative, and Asian markets outside of China, which have become benefi ciaries of the trade war. Globally, we also think opportunities exist in companies that are innovating, finding cost synergies in mergers and acquisitions or pulling other levers of growth, as well as in firms attuned to Environmental Social Governance (ESG).
China's investment in developing Asia
Increased 200% in 20183
INVESTOR CONCERN
Fixed Income
INVESTOR CONCERN
Negative interest rates and bond yields, along with weak economic data, paint a challenging backdrop, but there is room to be positive within Fixed Income, an asset class that can tolerate mundane economic conditions.
Set Realistic Expectations
Central bank policy will determine if a global recession is avoided in 2020 – and we believe it will. This will be coupled by an extension of the credit cycle, where access to credit remains relatively easy, supporting corporate bonds, but with the mathematics of already-low yield*, investors should prepare for modest returns from Fixed Income generally.
Central Bank Interest Rate Moves
56 cuts in the third quarter of 2019 v. 27 hikes in the third quarter of 20184
Be Active
We are cautious on valuations. These are generally high and, with government bond yields* so low, there are meagre foundations for meaningful returns. Certain sectors and areas of the market will be susceptible to shocks, particularly in a US presidential year; other areas will find support. We expect an increase in the dispersion of returns and, as disruption continues, active positioning among investments will be key.
Negative-Yielding Government Debt
US$ 13 T5
Take a Broad Perspective
The search for yield will force investors to look across the entire range of Fixed Income, with asset- and mortgage-backed securities being of potential interest. ESG considerations will also become ever more relevant. It is important not to become anchored in one’s thinking or positioning when navigating the geopolitical and sentiment shifts ahead.
*The level of income expressed as a percentage. For a bond, this is calculated as the coupon (interest) payment divided by the current bond price.
Alternatives
Alternative investments have grown markedly in popularity. The asset class is ever more relevant as investors question how much more traditional asset classes have to give. We believe diligence is required when assessing the options.
Know your Sources of Return
Many Alternatives managers rely too much on broader market performance to generate returns. This is unlikely to provide diversification in a downturn. We believe it is critical for investors to understand whether returns are reliant on skills-based investing – with genuine diversification benefits – or exposure to markets when assessing opportunities, and we advocate for the former.
We believe Alternatives investing should provide
True diversification from traditional asset classes
Be Aware of Changing Market Dynamics
The increasing number of retirees means that society’s sensitivity to investment loss is increasing and the potential consequences more pronounced. It is important to be mindful of the extensive measures taken to support the economy over the last decade and its impact on asset class returns.
Watch Risks to Traditional Asset Classes
At this late stage in the market cycle, we look for structural shifts that indicate a mispricing of risk. Since 2009, Equities have been artificially buoyed by companies making the most of low interest rates and subsequently the low cost of borrowing to fund the purchase of some of their own shares. We believe investors should watch for a reversal of this trend, with potentially meaningful results in 2020. In our view, while timely given current conditions, adding truly diversifying sources of return to balanced portfolios is an approach with long-term merit.
Equity buybacks by US companies since 2009
US$3.7 T6
INVESTOR CONCERN
Investment themes to watch in 2020
At Janus Henderson, our investment teams discuss and debate their views regularly but are free to form their own opinions of opportunities and risks in the marketplace. Our Market GPS: Investment Outlook features the views of our asset class heads. The views of individual portfolio managers are featured on the Insights section of the Janus Henderson website as part of our Knowledge. Shared approach.
1Source: Refinitiv Datastream, Bureau of Labor Statistics, U.S. Department of Labor, U.S. Unemployment Rate, Seasonally Adjusted, September 2019.
2As of 31 October 2019.
3Source: Asian Development Bank, December 2018. Greenfield investments are projects in which investors establish a new business or expand operations in foreign territories.
4Source: CBRates.com, November 2019.
5Source: Bloomberg, Bloomberg Barclays Global Aggregate Negative-Yielding Debt Market Value, November 2019.
6Source: Bank of America Merrill Lynch Research, September 2019.