Investment Outlook 2020

Our investment themes for the year

Our Investment Outlook videos feature commentaries from members of our senior investment team on the global investment outlook for 2020

Looking forward to 2020

Will the new year bring joy or worry to investors?

While 2019 proved to be a stellar year for investors, will 2020 continue this trend of clear and steady growth or do investors need to strap themselves in for a more turbulent ride? Will Hobbs, Chief Investment Officer, looks back at 2019 and charts what drove investments to such heights and what we can expect in the coming months of 2020.

So 2019 has been an amazing year for investors and it's been an amazing year in many other respects as well, or there's been lots of lessons for investors to learn this year.

What you've had is a contrast between incredible capital market returns, stocks have done well, bonds have done well, almost everything has done well.

And that's contrasted with an economy which has been fairly lacklustre.

People have been worrying about the next recession, and still are to a certain extent.

So it shows in some way how important it is for investors to tune out noise about forecasting recessions and all those kind of things and actually just be on the pitch, that's the main lesson from this year.

The other less I guess is also one that's been persistent from this economic cycle and one that we can carry into next year and really that's we've got to find good reasons to bet against the global economy.

Growth is the norm not the exception, you should be bored of hearing us say that, but as we look into the next year (2020) the risks of a recession are actually receding a little bit.

You're finding that the world's manufacturing sector is kind of groggily coming to its feet, coming to a little bit as we speak, and you should find that some governments around the world loosen their wallets a little bit particularly in Europe.

And set alongside that you've got interest rates, monetary conditions in very stimulative territory, so our suspicion is that this elongated economic cycle has got further to run yet.

That doesn't mean that you can expect the same again this year.

Our suspicion is that you can expect lower returns going forward for this year and that's probably because profits growth is going to be pretty meagre and quite a lot of the returns you've experienced in stocks this year have been from valuation expansion which probably hasn't got further room to run as we look into next year in our opinion.

And if you do want to know more about all of this and all of the stuff going on in capital markets and the world of politics and economics on a more regular basis, then we can certainly aim to keep you informed with our weekly podcast Word on the Street.

Do please subscribe and we hope to keep you as informed as you need to be.

Are fears of a recession justified?

Looking beyond the headlines

Fears of a recession are dominating investor conversations – and for good reason. The risks of a recession have been higher than they’ve been for several years. Jean-Paul Jaegers, Head of Asset Allocation, looks beyond the headlines and talks about the actual likelihood of experiencing a recession in 2020, as well what we can do to prepare for what the future may bring.

There is one word that tends to grab investors' attention quite regularly, it is 'recession'.

That is often thought to be for a very good reason, as a recession is the technical term for two consecutive quarters of a shrinking economy, and this often coincides with financial markets going down.

A few lights on our recession warning dashboard have been flashing amber in the past 12 months.

The risks of a recession have at times been higher than they've been for several years.

The global manufacturing sector slumped amidst a slowing Chinese economy and rising trade tensions.

So far, the world's consumers have managed to hold the line.

Sharply lower interest rates in more or less all countries have also probably helped.

The problem for investors right now is that this is an economic cycle where persistently frayed investor nerves have seen safety as a more-prized-than-usual trait.

This is not too surprising.

The last recession was unusually deep and was far from the norm.

However, the doomsayer trade has of course prospered in its shadow.

The result is a world where safety is dear.

Why this recession obsession?

Financial markets are in a sense related to the state of the economy.

In times when the economy is doing well, companies tend to generate profits and dividends, and investors are comfortable to pay higher prices for assets that provide 'economic' pay-offs.

However, when an economy struggles due to a shock like a housing market collapse or a technology collapse, we see stock markets drop and see the price of safety rise.

However, it is a misconception to think that investing is all about avoiding the recessions.

Imagine for example if an investor would have had perfect foresight, and sold his investments exactly at the point a recession started and held the proceed in cash, while investing again when the recession ends.

If one compares that to the being invested all the time, that is throughout the journey, you'll find that that being invested all the time would have resulted in larger returns.

That is because at the start of a recession financial markets drop, but soon start anticipating the recovery, thus the first half of a recession looks very different for financial markets than the second half of the recession.

Even if perfect foresight would not help us, we also have to realise that the chance of getting it exactly right are actually quite slim.

Large organisations with vast resources, economist and analyst, like for example the IMF or World Bank, are still not able to point out to us, well ahead of time, which economy will roll over.

So where do we look at?

One lens would be to look at vulnerabilities in an economy.

Is there too much debt being generated relative to income?

Are companies becoming overconfident?

Here we see there is rather limited evidence of that at the moment when we look at the data.

Another lens might be to look whether economic data is rolling over in concert, i.e. do we pick up the economic downturn in time?

Is the weakness sufficient widespread that it signals a struggling economy?

These measures are also not infallible and actually don't say anything about the magnitude of the economic dip.

What's our view peering into 2020?

We actually think a recession in the US is not imminent.

And although a wobble to economic growth can happen at any point in time, we know that financial markets anticipate recessions far more often than they actually do occur.

Given the length of the current economic expansion and the long shadows of the last financial crisis, we actually think these swings in investor sentiment, from exuberance to fear, is in a sense symptomatic of where we are.

Yes, economic growth has slowed in the past 12 months and in particular in the manufacturing sector as well as export-oriented economies have felt the brunt, but we do see that central have stepped in again by lowering interest rates in order to support the economy.

We don't position investment portfolios on a belief of an impending recession or not, as our ability to get it right, and well ahead of financial markets is actually quite slim.

We do however analyse the economy and look for strength and weakness which will influence our investment views, but this is far from a binary yes or no to a recession.

Toby: Hello, and welcome to another of our 2020 Outlook videos. I'm joined today by Robert Smith who's head of our Behavioural Finance team. Now Rob, the Christmas period, the New Year period, that's typically a point where people will stop for a period of reflection. They might look back over the year, project forwards and think: "Actually I've got some time off, now's the time I'm going to sit down and have a look at my finances". But we as human beings are pretty bad at doing that effectively, aren't we?

Robert: So intriguingly it seems that we're mostly aware that we're not very good at setting goals for ourselves, but it doesn't necessarily stop us from doing it, and actually there's a host of studies that show that the vast majority, even over 90% of us, will fail to achieve those and many in fact fall foul in the first month.

Toby: So I wonder, Rob, are there any specific things that we can that we can focus on?

Robert: Yes, so setting good goals is really important. So they need to be achievable. They need to be realistic and need to be well defined so that we can measure our progress against those goals in order to get the emotional feedback that we need to try and meet the goals.

Toby: Do you have any insights or tips from the behavioural science perspective on how people can actually stick to them - how am I going to stick to my new year's financial resolution?

Robert; So it's really important for investors to think about what lies ahead - it's vital to have realistic expectations. Because in the short term no matter what amount of risk you take, inevitably you're going to experience some short-term losses. Now whilst your long-term objectives rarely will depend on the value of your portfolio at the end of the next week or the end of the next month, it's important to be able to weather those short-term storms in order to stand a better chance of achieving the long-term returns.

Toby: If you're the sort of person that may be tempted to check every day, and the slightest sort of downturn in a portfolio may cause you to do something that wouldn't necessarily be in your financial self-interest, what sort of tips can we give to people who may feel that way? Really it's just to know yourself, isn't it?

Robert: Exactly. So while it's important to not only know what your goals are, it's important to have a slight introspective look at yourself in order to understand not only whatever attitude you have towards taking on long-term risk and return but also how are you going to feel in the interim, in the short-term periods when the market inevitably delivers you some ups and downs.

Toby: So another thing that investors face is the anxiety about when to put money into the market, the market timing aspect. And it always feels like tomorrow is going to be a better day to invest than today. Do we have any tips to help people think about when the right time might be?

Robert: Our advice is to get invested as soon as possible - our analysis shows that it's actually the time you spend invested that's more likely to be a determinant of your success against meeting your goals than trying to individually time the ups and downs of the market itself.

Toby: Another thing that people can do is phase their money into the market. I wonder if you can just really explain that concept and why that might be helpful.

Robert: If you're nervous about getting invested right now, which is understandable in the current climate, then it's really important to make a plan: so write down when you're getting invested, how much you invest each month because it will help you average out the volatility that can be provided by the markets.

Toby: So that's if I know that I get paid on the 15th of the month I'm going take £200 and I'm just going to pay that straight into whatever investment I'm looking to buy and I'm going do that every month regardless of the price?

Robert: Exactly. And if prices do continue to go up, then obviously you may have bought at a slightly increased cost, but if that's what it takes to get you invested in the first place then it's a price that's worth paying for the long term.

Toby: Are any specific tools that we can use to help with that?

Robert: So in this case, it's often the simplest advice that's best. So I would suggest writing down your plan, writing down the actions that you will take, the actions that you won't take in the future. It's really important to do this in a moment of clarity and calmness before you get on the emotional rollercoaster that is investing and you can then use this as a reference when inevitably you're in the middle of a loop-de-loop and it will help remind you why you got on in the first place.

Toby: Just to summarise then there, do we need to be aware of some of the anxieties and personal biases that we may have about investing. The Christmas period, that vacation, the end of the year, is actually quite a good point to sit down, take stock and plan for the time ahead. But be aware of the fact that most people are going to break these resolutions and a key tool is to actually write down a plan, commit it to paper, and when you feel like you might not want to do it just have a look at the piece of paper, remind yourself what you were planning to do and the reasons why you wrote it and that might help things gel a bit more?

Robert: You can think of it as a contract with yourself and what's really useful if you can, is to share it with family, share it with friends, because that will really help create the commitment that you need in order to be a successful long-term investor.

Toby: It seems that planning is the key and in the words of the great Hannibal Smith from the 1980s hit TV show the A-team 'I love it when a plan comes together'. Rob your behavioural insights have been extremely valuable and hopefully they're going to help you become better investors in 2020.

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