Equities 2020 Outlook
Developed markets (DM)
- Our 2020 scenario for DM equities is admittedly a cautious one. Nonetheless, despite 10 years of a bull market, we still foresee positive returns next year as other liquid asset classes fail to provide an attractive alternative to generate performance.
- From a profit-and-loss perspective, sales should increase modestly in a scenario of slowing nominal GDP growth without a recession. Increases in wage costs should be balanced by tame raw material prices, enabling margins to remain high.
- High equity valuations could remain so against the backdrop of a supportive low yield environment. Finally, dividends and buybacks are expected to drive around 70% of expected returns for DM equities in 2020.
- Structural growers and dividend growers remain at the core of our equity allocation. Quality cyclical is an attractive add-on given demanding valuations.
Emerging markets (EM)
- The environment is not shaping up to be particularly attractive for EM equities in 2020. Notwithstanding a potentially positive start to the year, we expect negative returns over the next 12 months, mostly stemming from valuation de-ratings.
- Despite encouraging signs (US dollar, EM/DM growth gap, monetary policy), macro drivers are mixed, leaving EM equities at risk from growth fears, earnings disappointments, and potential flight to quality in the second half of the year.
- In addition, data show that EM equities are relatively expensive and that the market has limited upside drivers. In the short term, a Phase I trade deal between the US and China, hopes of a cyclical rebound in major economies and seasonality factors may help. But we fail to see sufficient support for EM equities over the entire year.