Annual Investment Outlook
Markets have progressed higher over the last year as concerns about a global recession that were prevalent at the beginning of 2019 failed to materialise and loose monetary policy from the major central banks continued to keep bond yields low. However, valuations have drifted to the higher as company earnings have failed to keep up with the pace of share price gains. While markets have been buffeted from the political and trade tensions between the US and China, there has not been a significant market selloff over the last 12 months. Although given the significant volatility seen at the end of 2018, a more benign year is not surprising.
The global economy remains weak, although there are now increasing signs that the worst is in the past. Poor data from the German manufacturing sector, that has borne the brunt of the slowdown, has begun to turn, although recent leading indicators are still showing the sector is contracting and will not return to growth in the near future. Elsewhere monetary data is signalling a pickup in activity, suggesting economic growth in the second half of 2020 will be stronger than it is now. Nevertheless, current forecasts are still for a slow pace of growth, with no significant bounce from the recent slowdown.
Domestically, the UK has had a much more turbulent year with the pound being rocked by political instability and fears over Brexit. However, for all of the negative sentiment, Sterling finished the year stronger that it began, helped significantly by the resounding Conservative election victory in December. While the election victory does not mean the end to the current political uncertainty, we are now hopefully entering the beginning of the end, and, while there are additional hurdles that need to be surpassed, there should be a boost to UK assets if these are achieved. Any sign that there is a potential agreement between the UK and EU on the future trading relationship will likely remove much of the Brexit related negative sentiment from markets which could unlock significant gains for investors in domestically focused UK equities.
The US Presidential election is likely to come into increasing focus for investors over the year, with voters going to the polls in November. The vote could have implications for markets, and much will depend on the Democrat nomination, which will be decided in June. There are a number of left-wing candidates that are looking to unwind many of the tax cuts introduced by Donald Trump which have had a strong part to play in the US equity market rally. While there has been campaigning going on for some time already, as the field of Democrat candidates is thinned investors are likely to pay increasing attention to the election and what it may mean for their portfolios. The standard discussion around the cost of healthcare is also likely to cause volatility in Biotech and pharmaceutical stocks, as seen in previous election cycles.
While equities cannot be considered cheap, we remain positive on their potential going forwards. Furthermore, as there are few alternatives for investors, particularly those looking for income, equities should continue to find support. Monetary policy is highly accommodative and with the backdrop of a modestly improving global economy as well as a potential interim trade deal between the US and China, corporate performance may exceed investor expectations, which are currently fairly downbeat. Within equities we also have a preference for those markets that are trading on low valuations both relative to peers and their own histories. This includes the UK, Asia and Emerging Markets. While there are clearly additional concerns when investing in these markets, we feel that these are more than compensated for by their attractive valuations.
We continue to remain negative towards fixed income. Where we do have exposure, we prefer shorter duration and higher quality corporate bonds. These should provide stability in the event of an equity market selloff, without an overly detrimental exposure to rising interest rates.