Three investments for 2020

Rob Morgan outlines three investments we believe could be well placed for the year ahead.

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  1. Rob Morgan

Despite several economic and political worries, 2019 has turned out to be a decent year for investors – but what about the year ahead?

In 2020, we believe investors can expect a world in which growth is slowing, but where central banks are accommodative in terms of keeping interest rates low. Markets are 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, while fundamental differences between the superpowers on technology transfer and intellectual property rights may remain unresolved.

Markets also seem to be extrapolating the recent slight improvement in indicators of economic growth into a more robust global growth picture. There is room for disappointment here, which means another year of above-average market returns is less likely. Yet some areas could do well despite this, and below I outline three investments we believe could make the most of the environment.

All three are part of our Foundation Fundlist of preferred options for new investment across the major sectors. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus.

GVQ UK Focus

Over the last three months, the UK economy has been running at stall speed and has been a notable underperformer in terms of 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 is likely to support a reacceleration of growth next year – Charles Stanley estimates in the 1.3-1.5% region. 

Another catalyst for an improvement in the UK’s prospects might be an increase 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 many investors will want to remain on the sidelines, but that means there is the potential for uncertainty to lift further and boost the UK market, particularly in relation to domestic-orientated companies which remain good value despite the ‘Boris bounce’ that followed the UK general election.

One lesser-known fund that might take advantage is GVQ UK Focus, which represents a concentrated portfolio of UK equities, with a bias towards small and medium-sized businesses. The fund has a relatively low turnover of holdings, is focused on buying high-quality companies with high and sustainable cash flows and takes a 'private equity' view of valuations. Although not a well-known name, the fund is run by experienced individuals and it is small and nimble.

GVQ’s team is unusual in that they have private equity backgrounds – investing in companies not listed on stock markets – and their process has historically been effective at identifying listed companies that subsequently benefit from merger and acquisition activity. This can be a positive driver of performance when portfolio holdings are purchased by a trade buyer at a premium to market value.

The managers are by no means targeting UK domestic exposure explicitly, and the fund does hold several primarily international earners but, given the smaller and medium-sized company bias and valuation focus, we would expect a more settled domestic picture to provide a useful tailwind to performance.

WHEB Sustainability

If 2019 was the year in which socially responsible investing entered the mainstream, 2020 could be the year that it really takes off. That’s because the need for action on issues such as climate change has reached a tipping point where the focus must be on positive action – not just incremental steps such as cutting back on consumption of fossil fuels.

As the director of the United Nations Environment Programme put it, “We need to catch up on the years in which we procrastinated." That’s why 2020 could by a huge year for the electric car for instance, and for concerted action from government and business. In investing too, the focus is increasingly on the positive. Rather than simply screening out the worst offenders, investors are targeting opportunities created by the transformation to a low-carbon and sustainable economy.

This specialist fund could be of interest to those who believe, despite global political tensions, the transition to a greener and more inclusive world is inevitable. WHEB is a pioneer in ‘impact’ investing and aim to identify companies with long-term solutions to sustainability challenges, and in doing so harness excellent growth potential.  The fund could also be of interest to any investors without this kind of thematic exposure in their portfolios as it could represent important diversification from ‘old economy’ businesses.

It is likely to perform best in an environment where trade frictions ratchet down rather than up, thereby paving the way for industrial change and international co-operation on important environmental and social issues, and less disruption to global supply chains.

BlackRock Gold & General

Uncertainty surrounding political risk, notably the US elections and Brexit, seems inevitable this year. There is also much focus on trade relations between China and the US, as well as the level of leverage in the financial system. Gold’s status as a refuge during times of crisis could make it an important diversifier in 2020.

Actions from the world’s central banks could provide a reasonable backdrop for gold too. They are loosening policy to try to stimulate more activity and, in some cases, to generate some inflation, and gold often does well when inflation is running ahead of interest rates. The likely economic performance in the US next year is inconsistent with the need to reduce interest rates further, but rates remain low and this means little ‘opportunity cost’ for holding precious metals versus traditional safe havens such as bonds and cash.

A higher risk route into gold is through shares in gold mining companies. These tend to represent a ‘geared’ play on the gold price, meaning that they multiply the effect of a rise – but also multiply any fall. This is because profits can be highly sensitive to what the gold price is doing, and the riskier firms could even swing from profit to loss or vice versa on these moves.

The fund on our Foundation Fundlist in this adventurous area is Blackrock Gold & General. Managed by the well-resourced Blackrock's Natural Resources Team, it invests in gold and other precious metal-related companies on a worldwide basis. The fund holds between 50 to 80 companies, the vast majority of which are established producers of gold, with exposure to pure exploration stocks (typically the riskiest in the area) relatively low.

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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