2020 Investment Outlook
Our 2020 annual outlook summarises our views and insights on the key questions impacting our portfolios today.
As a reminder, our approach is not to make short-term decisions in markets that are volatile and unpredictable. We do, however, invest probabilistically, and this approach forms the basis of our longer-term strategy which is discussed in this document.
SUMMARY OF OUR VIEWS
- In the medium-term interest rates will remain near record lows given the absence of inflationary pressures and low global growth. The Federal Reserve’s decision to reverse course and cut interest rates from 2.25% to 1.5%, a resumption of Fed QE via Repo Operations, and on-going negative interest rate policy in Europe and Japan, have depressed bond yields and stabilised financial markets. This has helped insulate economies from external shocks such as trade tensions between the US and China, Brexit, etc. We see little incentive for central banks to change course.
- In the near-term, recession risk has reduced mainly due to the monetary stimulus mentioned above. The US consumer, responsible for two-thirds of US GDP, remains in good health with record low unemployment and carrying less leverage than in the recent past.
- Political risks continue to remain elevated. There is little sign of the trend towards more populist / nationalistic governments reversing. This makes the kind of co-ordinated global response we saw in the last financial crisis less likely as governments have become more inwardly focused. This increases tail risk in our view.
- In time, we see increasing pressure for higher fiscal spending. We are sceptical that QE and Negative Interest Rate Policies (“NIRP”) are as effective now as when originally introduced. Alternative approaches such as higher fiscal spending will be needed to reflate economies, however, the timing of when this happens is uncertain. Nevertheless, this forms a core reason for us to hold some Gold in portfolios.
- We see limited upside in equities in the medium term given current valuations. We think earnings growth will need to surpass expectations to see high single digit returns. UK “domestic” equities appear attractive due to their discount to global stocks and have the potential to outperform if Brexit is managed well. The US now looks fully valued, but we are reluctant to go under-weight US equities given the high quality of companies in the region.
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