OCBC OneWealth App– Charging bull or breathless cattle?

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Outlook 2020

Vasu Menon

Executive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

Charging bull or breathless cattle?

8 January 2020

In brief

The macro outlook is looking better, but uncertainties remain. Valuations for equities and bonds are not compelling at this juncture but neither are they expensive.
Stay invested but protect your downside by staying diversified across asset classes and over time.
There’s money to be made in 2020 and beyond, but returns may not be as strong as 2019 after what’s been an exceptional year.

Investment markets did very well 2019, leaving many to wonder if they have more upside in 2020.

2019 was indeed an exceptional year. Despite trade war concerns, slower economic growth, recession fears and uncertainty about Brexit, equities, bonds and gold all climbed a wall of worries to record strong gains.

Sentiment has improved in recent weeks after a series of better-than-expected economic data led to optimism that green shoots of economic recovery are starting to emerge. Fears about US-China trade ties and Brexit have also subsided quite significantly.

So, are these good reasons to adopt a more aggressive investment posture at this juncture?

There are reasons to believe that markets could have more upside, but the returns are unlikely to be as strong as 2019 and volatility could increase in the run-up to the US Presidential elections in 2020.

Green shoots of recovery

Investors were hopeful that the economic policy stimulus in 2019 may help to stabilize the global economy in 2020 and help green shoots to emerge.

This has been borne out in recent global economic data, pointing to a modest global economic recovery in 2020.

The manufacturing sector which has been weak and a drag on the global economy has shown signs of improvement.

The purchasing manager index (PMI) for the global manufacturing sector, which is a leading indicator, has been improving since August 2019, leading to hopes that the sector could be headed for better times in 2020.

In the manufacturing sector, chip makers are seeing better times driven in part by 5G technology and greater spending on technology due to digitalisation.

Headwinds remain

But it is still early days to turn too positive about the economic outlook. Even if there is a rebound, it may not be a strong one.

We are forecasting that global economic growth will improve from 3% in 2019 to 3.3% in 2020.

Much hinges on the US-China trade situation which has improved after a preliminary Phase 1 deal was struck in December 2019. However, given the twists and turns with US-China trade ties, it remains to be seen if the seemingly better relations will indeed see a sustainable improvement. The next phase of trade negotiations (Phase 2) involves more complex and trickier issues and it is not clear if the two economic giants will clash once again and undo the good that’s been done so far.

Investors are hoping that Trump, who could face a tough election battle in November 2020, will not want to escalate trade tensions which could hurt the US economy and his chances of getting re-elected.

The US Presidential elections on its own however, could cause greater market volatility in 2020, especially if a hard-left candidate wins the Democrat nomination and political uncertainty rises before the November polls.

In the UK, even though the Conservative Party has won a decisive majority in the December 2019 elections, Prime Minister Boris Johnson has only eleven months to strike a trade deal with the European Union, which is a very short time. Failure to do so will mean a no-deal Brexit which will spook investors.

Remember also that in 2019, markets got a boost from rate cuts and looser monetary policy. While monetary policy will remain accommodative in 2020 and this is supportive of growth, most major central banks may not cut rates further unless the global economy takes a turn for worse once again. So, equity and bond markets may not be able to count on central banks for a big boost.

Turn volatility into opportunity

Given the potential headwinds ahead, investors should not throw caution to the wind and turn too aggressive.

But they must be careful not to become overly cautious either, as markets could surprise on the upside as they did in 2019.

Bear in mind that if the US-China trade ties and the Brexit situation continues to improve, if economic data surprise on the upside, and if we see greater fiscal policy support; this could boost investor sentiment and send markets higher. So, it makes sense to stay invested.

From a total portfolio perspective, we are modestly overweight on equites and bonds at this juncture.

In the equities space, we are overweight on European equities which, having underperformed its global peers over the past five years, are more attractively valued versus other regions.

European equities offer better risk-reward relative to the US and Asia, given their valuations and fundamental outlook. European equity valuations have, to a large degree, discounted the economic weakness in Europe and the geopolitical issues relating to Brexit and Italy. Within European equities, we are overweight on energy, healthcare, consumer staples and consumer discretionary, and are neutral on financials.

Even though we are overweight on European equities, it is worth noting that we are not negative on US, Japan and Asia ex-Japan and maintain a neutral weighting for these markets. So, it still makes sense for investors to have a diversified equity portfolio.

Following our upgrade of Asia ex-Japan equities on easing trade concerns late last year, we lifted our country ratings for Singapore to overweight as we see selective opportunities in the REITs, real estate, telecom and airline sectors. Singapore companies have also proven to be attractive because of their good yield. Dividend pay-outs are predictable and consistent, especially for the STI component stocks.

As for bonds, the search for yield in a low interest rate environment should continue to offer support to bond markets, especially high yield bonds. There are various ways to buy into high yield bonds. One way is to buy directly into specific high yield bonds, but this carries greater risk, involves a significant outlay and needs careful credit analysis for default risk. A less risky way is to buy into a fund that invests in high yield bonds or a multi-asset fund that invests in a variety of asset classes including global equities and high yield bonds.

Tread carefully

In a nutshell, the macro outlook is looking better, but uncertainties remain. Stay invested but protect your downside by staying diversified across asset classes and over time. Valuations for equities and bonds are not compelling at this juncture but neither are they expensive.

There’s money to be made in 2020 and beyond, but returns may not be as strong as 2019 after what’s been an exceptional year.

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