January 2020 / INVESTMENT INSIGHTS
Quarterly Outlook: Receding Tail Risks Support Equity Markets
- Several developments could support equity markets at the start of 2020: global trade and Brexit-related tail risks have receded, and we have found the bottom in global manufacturing indicators as well as inflation and interest rate expectations.
- The U.S. Federal Reserve is unlikely to interfere in the upcoming Presidential elections by meaningfully changing its stance, so we should continue to have a supportive interest rate environment and money growth.
- China, which represents our largest country overweight, is a potentially rich source of highly innovative companies at the forefront of secular change and disruption.
We remain in a world where growth and interest rates are low, in part because disruption is so prevalent—creating capacity and abundance. We believe this environment will persist.
Retaining Conviction in our Cyclical Names
We were well positioned to take advantage of the cyclical rally in the latter part of 2019 and do not currently see any reason to become defensive. We have been carefully contrarian by retaining conviction in our cyclical names, but we also continued to have exposure to quality, durable growth names that sold off in early autumn.
Looking ahead, there are several developments that we think could support equity markets at the start of 2020. Global trade and Brexit-related tail risks have receded, and we have found the bottom in global manufacturing indicators as well as inflation and interest rate expectations.
Year-over-year comparisons in the first half of 2020 should be more favourable of the global industrial economy. This is because the data will be measured against a lower base due to the initial disruptions caused by the U.S.-China trade conflict a year ago. We also expect that the U.S. Federal Reserve is unlikely to interfere in the upcoming elections by meaningfully changing its stance, so we should continue to have a supportive interest rate environment and money growth.
Adding Exposure to China’s Big Internet Platform Companies
We view China, which represents our largest country overweight, as a potentially rich source of highly innovative companies that are at the forefront of secular change and disruption. We have used periods of volatility to add to our positions in several of the country’s big internet platform companies. While there was a broad-based slowdown in the Chinese economy in 2019, we are seeing signs of stabilization and expect gradual improvement as the year unfolds, especially as trade tensions ease.
The second half of 2020 will be dominated by the U.S. election, and we are conscious of the unpredictability of a presidential race that remains wide open and has the potential to be very disruptive for many sectors.
Benefits to Being Carefully Contrarian
As always, we are remaining true to our framework: investing in quality companies where we have an insight about improving economic returns in the future and where valuations aren’t excessive. Given our focus on companies on the right side of change, we remain wary of areas that are subject to structural challenges. However, we think there are benefits to being carefully contrarian in select areas where we have differentiated insights.
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