Five key investment trends for 2020

Rob Morgan outlines five important trends for investors to keep an eye on in the year ahead.

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  1. Rob Morgan

As 2019 draws to a close we can reflect on an eventful year, but one that has been kind to investors. As I write the FTSE 100 has returned 17.8% in the year to date (with dividends reinvested), and global stocks have produced even better returns. The MSCI World index is 23.0% higher in sterling terms, again with dividends reinvested. Source for data: FE Analytics, total return basis, 31/12/2018 to 20/12/2019.

Investment gains may be harder won in 2020, though. The strong rally in global share markets in 2019 and the current background of market optimism brings about the risk that investors are disappointed – either by corporate earnings or geopolitical developments.

There is also increasing uncertainty around the technology sector, which is increasingly in policymakers’ crosshairs over concerns over issues such as data privacy, global taxation, competition and content moderation. Large tech firms have made a significant contribution to driving markets higher over the past few years and if they start to struggle then US indices will too.

Therefore, while we expect reasonable investment returns overall, we would caution against anticipating another year of above-average returns in global financial markets.

Here are the key market trends, some of them interlinked, we think will shape the year ahead.

 

  1. Slow but steady growth with low inflation

In 2020, investors can likely expect a world in which growth is slowing, but where central banks are accommodative in terms of keeping interest rates low. With little sign of inflation in Europe and Japan in particular, bond yields should remain very low and prices high. This is not a bad environment for share markets and, however, reluctantly, investors are likely to continue to look to them for income.

There may also be renewed measures to stimulate economic growth through government spending, for instance on big infrastructure projects. In the US, Donald Trump will be keen to keep economic growth buoyant as the presidential election approaches, although US protectionism looks set to continue under his administration and this brings trade negotiations into the spotlight.

 

  1. Trade worries

Investors are currently anticipating a so-called ‘phase one’ trade deal between the US and China, which will see the rollback of some existing tariffs on US imports from China.  Much of the optimism on next year’s growth and corporate earnings outlook rests on this.  However, it is likely the fundamental differences between the nations on technology transfer and intellectual property rights will remain unresolved. 

US national security concerns are increasingly leading to restrictions on Chinese access to technology, while China is aiming to develop a sophisticated indigenous technology industry not susceptible to US trade restrictions. The US also has fractured its trading relationships with other parties, notably the European Union where it has threatened tariffs on the automobile and auto parts industries. How these disputes play out will have far-reaching consequences for many international businesses and for global growth in general.

 

  1. US Presidential election

By this time next year, the US will have (re-)elected a president. Significant policy changes usually require single-party control of the White House, Senate, and House of Representatives, and this may be unlikely. However, a change of political direction could still impact markets.

Investors have got used to Donald Trump’s Republican brand of populism but must increasingly consider what the left-wing policies of Democrat candidates Bernie Sanders or Elizabeth Warren might mean. Currently, the more moderate Joe Biden is leading the Democratic race. If he wins the nomination, polls suggest that he could defeat Donald Trump in November 2020. If that were to happen, the market would need to digest the end of Trump's deregulation and market-friendly policies and consider whether it outweighs the ending of his trade wars.

 

  1. UK outperformance?

Over the last three months, the UK economy has been running at stall speed and has been a laggard in a world of sub-par economic growth.  However, a combination of a modest uptick in global business activity and the Conservatives party’s sizable spending plans following the election landslide could support a reacceleration of growth next year to an annual 1.5%. 

Another catalyst for an improvement in the UK’s prospects is likely to be a significant pickup in business investment now that some of the uncertainty over Brexit has been removed. The nature of the trade deal with Europe is, of course, still to be determined. Tariffs and trade friction could be damaging, and no doubt some investors want to remain on the sidelines, but that means there is the potential for uncertainty to lift further and boost the UK market. This is particularly the case for domestic-orientated companies, which we believe remain decent value despite the ‘Boris bounce’ that followed the UK general election.

 

  1. Spotlight intensifies on decarbonisation and sustainability

The annual UN climate conference in December, COP25 in Madrid, became the longest ever following more than two weeks of fraught negotiations. Ultimately, however, the extended talks were unable to resolve the main issues required to implement the Paris climate agreement, like creating rules for trading carbon emissions credits and helping developing countries pay for changes needed to reduce carbon emissions. The world will soon have another chance, though. The unresolved issues will be discussed in the next rounds of UN climate negotiations Bonn, Germany, in June and in Glasgow in November.

Whatever happens, the impact of intensifying policy focus on climate change is likely to be felt. Emissions could reach another record high in 2020, raising the risk of an abrupt and disruptive policy response. Even if politicians and UN delegates are struggling to agree, many parts of the corporate world are anticipating change and recognising the need to invest positively in transforming energy infrastructure, electrifying transport and other systems and improving energy efficiency. There are investment opportunities across all these areas, especially as consumer preferences evolve further in favour of more sustainable, more climate-conscious products.

Investors are also increasingly waking up to ‘transition risk’, targeting stocks that stand to benefit from the trend of decarbonisation in preference of those that could subject to increasing scrutiny and tightening regulation.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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