As we look ahead to what 2020 may have in store for investors, there is one phrase that crops up everywhere we look: Cautious Optimism. Key risks have been abating in recent weeks, and markets have been lifted by trade optimism and central bank stimulus, however it is clear that the global economy remains in a fragile condition. It still remains to be seen whether bright spots observed in the data are temporary flashes of light against an otherwise bleak backdrop, or a more sustained improvement in the growth outlook.
What is consistent among all commentaries and forecasts is that the outlook has improved somewhat on a phase one US-China trade deal and a resolution to the Brexit deadlock which weighed heavily on market sentiment for the majority of 2019. At the same time, with stock markets at all-time highs while key economic indicators remain weak, the end of the cycle looms over markets, suggesting that ‘Cautious Optimism’ may well be the best course to navigate through markets in 2020.
As it stands, we maintain our defensive position as we are not yet convinced that the recent performance in the main (large cap) markets is sustainable given current valuations relative to earnings, and therefore on a risk-reward basis we do not see sufficient returns from this asset class in the near term. At the same time, we do see opportunities arising in other areas of the equity markets and therefore will continue to take advantage of these opportunities as they arise. In December, we added exposure to small cap UK, European and Global equities as part of our staged re-entry into equities, with particular potential in this area given recent underperformance and supportive conditions.
As we go into the new year, we are optimistic about risk-on asset performance, and expect to see a mild growth pickup in the first half of the year supported by a stabilisation of the data, loose central bank policy and short term de-globalisation, with domestic economies remaining strong. Although abating, Brexit and Trade risks are not yet removed, and there could be a resurgence in these risks, although it is our view that this risk would be weighted towards the second half of the year. We see recessionary risks being kicked further down the road as a result of renewed central bank stimulus and optimism over trade, while a sell off in large cap markets is likely to now be much milder than first thought, and may come as a result of a rotation from large to small caps should the earnings recession continue at current valuations. Should the data improve, it is likely that a sell off would be pushed later into the year.
Overall, we echo the economists in their Cautiously Optimistic stance, observing weak economic conditions, but recognise that there are opportunities arising, and conditions appear to be showing signs of improvement. Over the coming weeks, the picture will become clearer, and we will be closely monitoring the economic data to ascertain whether the bright spots are more than temporary flashes, however our expectations are for positive drivers of growth to continue in the first half of the year. In the second half, however, we could see more challenging conditions, making 2020 a proverbial year of two halves.
As always, we continue to monitor markets and the economic data, however we enter 2020 feeling optimistic about the year ahead for our OBI portfolio performance.
For more information on fresh Chinese stimulus which is moving global markets this week, please see the attached Market Update document.
Key Events We Are Watching This Week:
- Friday: US Manufacturing for December, FOMC minutes
- Monday: Global Services PMI data for December
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset also attached.
Model Portfolios & Indices
Global equity markets were mixed over the week, with trade optimism being followed by thin trading over the holiday period. The OBI portfolios remain defensively positioned in comparison to normal market conditions, and we continue to closely monitor the data, looking for opportunities as they arise. The portfolios gained over the week owing to strong performance of our small/mid cap assets, with changes made in recent weeks expected to continue to provide further support to portfolio performance going forward.
Please note that as markets were closed yesterday, the data in the table below reflects YTD performance for the whole year. From next week, it will reflect performance from the start of the new year.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1968, Cecil Day-Lewis was appointed British Poet Laureate by the Queen. He published poetry and detective stories under the pseudonym Nicholas Blake. He remained the Poet Laureate until his death in 1972.
Have a great week,
Jason & Gina