Despite our cautious scenario for next year, we foresee positive returns for DM equities in 2020, with structural growers and dividend growers remaining at the core of our equity allocation. We remain more wary about EM equities.
Jacques Henry, Cross-Asset Team Leader & Julien Holtz, Emerging Market Strategist
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.