House View, January 2020

Asset Allocation

• Our asset allocation is dominated by a wish to stay diversified in a fragile environment. Continued ‘noise’ around trade is likely to leave markets alternating between disappointment and hope. With this in mind, we have a neutral stance on government bonds and developed-market equities alike, although we still see select opportunities in equities and appreciate the protective function of safe-haven bonds. Geopolitical events such as the tensions between the US and Iran will lead to volatility, which can be exploited tactically. Potential spikes in volatility also mean we have a positive stance on gold.
• We also favour illiquid assets to mitigate volatility and boost returns in a low-return environment. As equities’ 2019 performance is unlikely to be repeated, an ‘endowment style’ approach to investing that includes recourse to alternative asset classes such as private equity is recommended.

Commodities

• The main driver of oil prices in 2020 could well be the risk of oversupply, with chances that Brent weakens to around USD50 per barrel, although we could see significant volatility because of geopolitical tensions and Saudi Arabia’s reduced role as swing producer.

Currencies

• Weaker US growth in 2H and renewed Fed easing should weigh on the US dollar as 2020 progresses.
• A near-term resurgence of Brexit uncertainties and further signs of economic weakness could lead to renewed pressure on sterling. Speculation around the currency will remain rife. The second half could see support for sterling grow, as long as Brexit-related issues are resolved.

 Equities

• After a stellar 2019, we expect lower, but still positive, total returns of around 5% from developed-market equities in 2020, driven essentially by cash returns. Equity valuations look rich, but are being made digestible by low bond yields.
• We favour structural growers that can grow independently of the market cycle as well as quality cyclical growth stocks with pricing power. Dividend-growing companies at a time of weak earnings growth are another focus of attention.
• Emerging-market equities had a roller-coaster 2019, yet still managed to notch up strong double-digit gains last year. Some short-term tailwinds have started to appear, but prospects will depend on the global economy regaining momentum and liquidity remaining ample.

Fixed Income

• Fixed income had a very good 2019 thanks to central bank easing, which pushed US and euro sovereign yields lower and enabled a tightening of credit spreads. Total returns from investment-grade and noninvestment-grade paper were similar, meaning it made sense to prefer quality.
• We have a neutral stance on global bonds and remain constructive on EM sovereign debt in local currency. However, we expect total returns from EM bonds to be more moderate in 2020, in the low single digits.
• We expect total returns to be in the low single digits in fixed income generally this year, except in US high yield, where returns may be negative due to widening spreads and higher default rates. Along with US high yield, we are underweight euro sovereign bonds due to low yields.