Global equities - 2020 outlook

In a world where the noise appears to have been turned up to 11, we believe it is important to try to separate short-term noise and speculation from long-term secular, political and social trends in order to make sensible, long-term investment decisions for clients.

Whilst over the last decade it has been the reaction of central banks to the aftermath of the Global Financial Crisis that has grabbed the headlines and carried markets higher, it is an indisputable reality of the last few years that political events have had an increasing impact on investing.

2019 was no different and the only prediction we can make for 2020 with any confidence is that this uncertainty is likely to continue.

The continuous analysis of short-term political and economic news is perhaps not surprising, especially in the context of the 24/7 twitter feed and increasing populism in many countries. However, the value of this analysis and how relevant it is to investment decision making is, at best, questionable.

In the short term, political events are notoriously difficult to predict, analyse or quantify. However, events that cause investment pain in the short term often provide long-term investment opportunities.

For example, maximum pessimism was reached in May 2019: fears of increased trade tariffs between the two biggest global economies, combined with slowing economic data and inverted yield curves (when longer term bonds yield less than short term bonds), had many macroeconomic analysts forecasting an impending recession. The market had a significant wobble and investors chased perceived ‘safe-haven’ investments.

However, it didn’t take long for many of these fears to subside. Trade tensions moderated, a new Brexit deal was agreed (if not actually signed!) and the slowdown in manufacturing didn’t contaminate other parts of the global economy. Almost incredibly, we went from a situation of 60% of the US yield curve being inverted to 0% in less than a month.

Inversion is often seen as being the dominant pre-cursor for a recession. However, for those investors that turned defensive at that point of maximum pessimism, it would have resulted in missing out on the strong rotation into more growth oriented ‘cyclical’ stocks we witnessed from late August as recessionary fears reduced.

Longer term changes to politics and social attitudes can have a longer lasting influence on asset prices – either directly by impacting corporate profitability or indirectly as risk premia rise and fall due to perceived uncertainty.

For example, we see such influences playing out on a global level due to changes in social attitudes towards issues such as climate change or e-commerce impacting the valuations of the energy and retail sectors.

As fund managers, we are free to spend our time trying to predict the impact of the next tweet from the US President or trying to forecast when the next recession is likely to occur. However, we are unlikely to be correct and it is not, in our opinion, the most efficient use of time if we are trying to add value for our clients.

Instead, we focus on areas where we believe we have an edge and an ability to add value: analysing companies; building compelling, valuation driven portfolios; quantifying the risks and opportunities of long-term shifts in politics, economics and society; and (ultimately) whether these risk and opportunities are priced into individual companies.

We have identified three key principles, which characterise our approach to fund management:

1. Avoid those companies with excessive leverage. Global debt levels continue to rise and are not sustainable in any alternative interest rate scenario.
2. Focus on industry leading companies. If valuation takes you towards cyclical stocks, invest in the best businesses that can invest counter-cyclically (so when the economy is less strong) and emerge from any downturn in a stronger position.
3. Avoid companies where valuations are stretched due to their perceived attractive characteristics (defensive, low volatility etc..), rather than their earnings and cash flow. Too high a price is too high a risk.

In an uncertain world, sticking to the above principles gives us the confidence to ignore the noise created by short-term political analysis and economic predictions. We believe we can use the fear generated by short-term traders to identify long-term investment opportunities for our clients.

Read more 2020 investment outlooks