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Overview

22nd January 2020

2019 was a surprising year for many investors, few imagined the S&P 500 delivering a gain of more than 28%, fueled by fast growing tech stocks, interest rate cuts, corporate buybacks and the lasting effects of the 2017 corporate tax cuts.

However, 2019 was also the worst year for global economic growth since the financial crisis more than a decade ago, achieving just 2.9%. In their latest economic outlook, IMF economists warned there “were no clear signs of a turning point” in global growth, and trimmed their forecasts for 2020 downwards. The US/China trade war reached a delicate truce, however the risks of further escalation are ever-present and this represents a significant risk to investors in 2020 alongside the global economic slowdown.

Chances of recession are increasing, with productivity growth rates in advanced and emerging economies at disappointing levels and many are worried that a better 2020 performance might simply happen because low interest rates are fueling the accumulation of debts that could ultimately cause great harm as they did in 2008. Growth in China has slowed significantly and we see major economies such as Germany and Australia already teetering on the edge of recession, with interest rates at critically low points many central banks lack the tools to stimulate struggling economies.

Equities are now 11 Years into a bull run and we have become used to seeing new records set regularly. Valuations are now so high, particularly for US stocks, that it is difficult to forecast continued growth without a correction. In fact valuations of US stocks have now reached historical extremes, with the price/earnings ratio showing the biggest disconnect we have ever seen.

Summary

  • Equity markets appear heavily overvalued and as the effects of decreased taxation wear off and the effects of excessive borrowing increase, we could witness a correction at any time
  • Global economic growth is poor, offering potential recession risks
  • Markets are more volatile and unpredictable than they have been for many years

What should Investors be doing for positive 2020 outcomes?

  • Investors should evaluate their exposure to equity markets and consider a pullback to safer, fixed income strategies to protect against a market correction
  • We see opportunities in a potential post Brexit recovery for the pound which is especially interesting for USD investors with dollar weakening looking increasingly likely, UK based assets also offer good value
  • With increased levels of risk inequities, the focus for 2020 should be on capital preservation with predictable and sustainable growth, using tangible assets, private equity, and fixed-term bonds to achieve growth above 5%, offering investors security and above inflation growth without exposure to overvalued markets

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