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2020 Investment Outlook - Markets Remain Resilient and Provide Opportunities

2020 is shaping up to be an eventful year. The headline event will be the presidential election, which is sure to be full of theatrics. Despite the phase one trade agreement, trade uncertainties will continue into 2020. The Federal Reserve will continue to provide headlines as well. Finally, unwrapping Brexit uncertainties will be an issue, while other geopolitical concerns will persist, particularly the protectionist policies.

Much like the past few years, uncertainty regarding U.S. and Global fiscal policies will continue. The U.S. presidential election will headline 2020. However, the ongoing trade war, Brexit, Hong Kong protests, and Middle East tensions will continue to drive risk-on and risk-off trades during the year. Regardless, these uncertainties will provide opportunities for patient investors.

The U.S. economic expansion will continue as headwinds including a soft manufacturing sector, weak business investment, and a strong labor market that is losing some momentum, will be offset by a strong consumer and their willingness to spend and an accommodative Federal Reserve. It is also worth noting that the upcoming election will play a role in fiscal policies. The health of the economy goes a long way to shaping a presidential election. We expect President Trump to do as much as he can to stoke the U.S. economy and try to have it running hot come November to give his campaign a boost.

Accommodative monetary policies around the globe will provide a soft landing for the global economy. Trade uncertainties will continue to hinder global growth. We believe the phase one trade deal will provide a boost to the global manufacturing sector, which will help the overall global economy.

With the U.S. economy in better shape than other global economies and poised to continue expanding, we continue to overweight U.S. equities. U.S. equities remain expensive, particularly the “safe” sectors. Although, we believe that earnings growth will rebound to mid- to high-single digits during the year, which will ease some of the valuations. Earnings multiples will continue to stay elevated as investors continue to focus on the solid U.S. economy, easy monetary policy, and solidifying fundamentals. Additionally, we like U.S. equities due to their relatively high quality and minimum volatility factors compared to foreign investments. Within U.S. equities, continue to invest in sectors that perform well late in the cycle and are consumer driven. We also like financials, which have underperformed during this 10-year expansion due to being highly regulated and historically low interest rates. However, valuations are very attractive, regulations are easing, and I think interest rates will climb modestly while the yield curve steepens. Finally, we believe the uncertainty will cause some mild sell offs during the year which will provide patient investors the opportunity to increase their exposure to the technology sector, which will benefit from easing tensions between China and the U.S.

As we mentioned earlier, we expect the global economy to hit a soft landing in 2020. Also, valuations make foreign equities attractive. However, the eurozone still has fundamental issues ranging from Brexit uncertainty to weak economies in Germany and Italy. We remain neutral on eurozone and emerging market equities, as the attractive valuations and solidifying global economy are offset by the geopolitical and country specific uncertainties.

With the U.S. economic expansion continuing and the Federal Reserve signaling no policy action in 2020, we believe Treasury yields will climb modestly higher. However, due to continued low yields and stretched valuations, Treasuries no longer offer investors solid yields and capital preservation. We believe Treasuries should be used as an effective portfolio diversifier and a hedge against risk asset selloffs. Furthermore, we continue to lean more towards municipals as a source for capital preservation and yields. Municipalities have improved their balance sheets during this 10-year expansion, which has reduced default risk and improved supply-demand dynamics. Credit markets will be supported by the continued economic expansion, stabilizing global economy, and conservative corporate behavior. High-yield debt will continue to be key parts to our income needs, as we prefer high yield debt more so than investment grade debt as investment grade debt valuations remain stretched. Additionally, it is important to note that the ballooning amounts of lower quality investment grade debt is susceptible to an economic slowdown, which could result in a large amount of credit downgrades. Finally, due to the U.S. economic growth trend, stabilizing global growth, and low interest rates globally, I like emerging market debt for investors seeking income.

U.S. and global equities will continue to display resiliency and finish 2020 modestly higher. It will be important for investors to remain true to their investment policy statements and focus on their individual investment goals and objectives. 2020 will not be a time to make extreme plays whether that is with allocations or timing. However, the uncertainty and headline risks will present opportunities for investors with long time horizons to increase exposure to cyclical sectors and underappreciated regions.

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