More Themes for 2020

Global Equities

More Themes for 2020

Equity yields and M&A activity could support global equity markets as earnings estimates are likely to come down.


Fiscal spending will be a talking point, but unlikely to translate into meaningful action 

Fiscal stimulus could increasingly be an important talking point for the market in 2020. The rhetoric has certainly been growing in Europe recently. However, we think that there will be limited ability for that rhetoric to move into action in Europe, given the lack of coordination, or indeed, agreement on what should be done and in what shape. For the US, we think there is little scope for increased spending – the Trump tax cuts and de-facto fiscal boost from a couple of years ago will end up being a very ill-timed initiative, at a time when the economy didn’t need that extra-boost. China is likely to be the only key economy to be able to use its fiscal lever to prop up economic momentum as and when required in 2020 – we believe this will be done in a measured way, rather than translating into a large boost.

Earnings estimates will likely need to come down in 2020

While 2019 has been a year of sharp downgrades to earnings estimates, with earnings expectations for MSCI All Country World Index (ACWI) now standing at a decline of around -2%, from around +7% expected at the start of 2019 by consensus, the 2020 estimates are still standing at a demanding +10%. We believe this is likely to have to come down from these levels, to closer to the mid-single-digit level, based on the current outlook for global growth. It means that investors will need to be selective in terms of picking the right stocks that have lower risk of downgrades, and or areas of the market where valuations are supportive despite the negative earnings momentum.

M&A activity will remain sustained and could further support equity markets

As per our prediction last year, M&A activity, which typically accelerates at this stage in the economic cycle, has remained strong. So far in 2019, we have had the same M&A monetary value year to date as we had in 2018, at over US$2.2 trillion. We predict 2020 to be another strong year of M&A activity, given the ongoing low funding costs. This should be another supportive element for equity markets in 2020.

Leverage needs to be watched out at this stage in the cycle

As we are getting further in the late stage of the economic cycle, and with borrowing costs as low as a result of accommodative central bank actions, leverage will be an important area to monitor, and to watch out for any trends towards excess. We note that generally the situation here is not concerning at this stage – household borrowing is low across key regions, while corporate borrowing is not alarming either, even if more elevated in the US, with credit spreads remaining very low.

Equity valuations not demanding, supportive vs bonds

Equity valuations will be an important focal point as always. While the market valuation is not particularly cheap (being broadly in line with long-term average on a price/earnings basis), we note that the attraction of the equity yield that the MSCI ACWI offers versus government bonds is one of the key valuation supports for the markets.

Style leadership in the market still likely to remain relevant

Earlier in 2019, we referenced the significant valuation spread between quality/growth and value styles. This remains very pronounced and will continue to be an important focal point for investors. We would reiterate what we highlighted before – that the correlation between the quality/value spread and the bond yields are an important determinant of whether we have a rotation. While we had some tentative rotation in September, this hasn’t followed through. We think we might have a few more instances of rotation, but sustainability of follow-through will be determined by whether bond yields can move higher in a meaningful way. We think this is unlikely given the tepid economic growth outlook and lack of sustained inflationary pressure. We are therefore of the view that any style rotations will be short lived.

ESG and sustainability moves into the mainstream with corporates and investors 

With an ever-greater focus on sustainability issues, particularly climate change, we believe that corporates and investors alike will increasingly focus on Environmental, Social & Governance (ESG) matters in 2020 and beyond. Some investors will be demanding a far greater ESG focus from their asset managers, with the trend likely to continue to gather pace over the years to come. This makes it critical for asset allocators to assess whether their portfolio managers genuinely and materially integrate ESG analysis into their process and can demonstrate real expertise of engagement.

With this final prediction, we would like to wish all our readers and investors a sustainable and prosperous New Year.


Definitions:

Correlation is a statistical measure of the relationship between two sets of data. When asset prices move together, they are described as positively correlated; when they move opposite to each other, the correlation is described as negative or inverse. If price movements have no relationship to each other, they are described as uncorrelated

A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

Growth refers to stocks of companies whose earnings are expected to grow at an above-average rate relative to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects.

Mergers and acquisitions (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

The MSCI All Country World Index (ACWI) is a market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

The price-to-earnings (P/E) ratio, also referred to as the earnings multiple, is a stock's (or index’s) price divided by its earnings per share (or index earnings).

Value refers to an investment approach that aims to select stocks that trade for less than their intrinsic values.

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