House View, December 2019
- We remain neutral global equities overall, seeing the US elections, continued trade tensions and a spilover of manufacturing weakness to consumer spending as potential sources of volatility. But we also see volatility as an asset class to be exploited. We are constructive on countries adopting fiscal stimulus, while possible US dollar weakness remains crucial for emerging-market assets.
- In equities, we favour structural growers that can grow independently of the market cycle as well as quality cyclical growth stocks with pricing power. Dividend-growing companies at a time of weak earnings growth are another focus of attention.
- We have moved from an underweight to neutral stance on global bonds and remain constructive on EM sovereign debt in local currency. We have a neutral view on credit, but we are underweight US high yield given signs of stress in the lower reaches of the ratings scale.
- Due to ongoing geopolitical tensions, the risk of oil price spikes remains elevated. Nevertheless, the possibility of a possible supply overhang will be the main factor in oil markets in 2020. We see Brent oil reaching USD50 by next spring and remaining close to this level for the rest of the year.
- We believe the US dollar is likely to weaken in 2020, given the decline in growth and rate differentials that have played in its favour up to recently. We think moderation in global growth and elevated political and economic uncertainty will support defensive currencies like the yen and Swiss franc as well as gold.
- We expect developed-market equities to deliver total returns of the order of 5% in 2020. We believe shareholder returns will be largely driven by dividends and buybacks. Low bond yields mean valuations could remain elevated.
- With markets looking relatively expensive and few visible upside drivers, but low rates and the lack of alternatives providing some support, the outlook for EM equities looks somewhat unexciting. Individual markets could still provide opportunities.
- Sector wise, we continue to believe some 'big internet' names are undervalued (but find some big hardware names less appealing). We have a selective view of industrials, while in healthcare, we are positive on med-tech, life sciences and managed care. We see greater potential for EU banks than their US equivalents as reference bond yields reach a trough.
- Our turn to a neutral stance on global bonds corresponds to our central scenario of continued monetary easing and sagging global growth. We see US Treasury yields pointing down again in H1 2020 before a rebound in H2 as the presidential election nears, although the risk of a sharp rise in yields is limited.
- Given our focus on quality in credit and ratings trends, we are underweight US high yield. We believe that renewed ECB bond buying will support euro credits in 2020.
- We continue to have a constructive stance on private equity. While we are neutral hedge funds, volatility and corporate events mean that macro and event-driven strategies could still perform next year.