CIO Team

Dec. 19, 2019

What we think

 

Economic slowdown worries have encouraged central banks to loosen monetary policy again, but many factors that are hurting growth are non-monetary in nature. Even though the effectiveness of monetary policy is nearing its limits, and calls for fiscal stimulus will be more vocal, we don’t anticipate a massive fiscal boost. Political developments will also continue to have an impact on markets.

 

Growth, earnings and valuations concerns will all tend to boost volatility, reinforcing the case for a prudent investment approach, active management and prolonging investment horizons, where this is appropriate, to secure better potential returns. In this environment, investors may be tempted to increase cash holdings, but holding a higher proportion of cash within a portfolio could mean accepting either higher risk for the remaining non-cash holdings or adjusting long-term investment goals.

 

For sustained portfolio performance, getting the right strategic asset allocation (SAA) remains much more important.

 

 

What we suggest

Robust investment approach and SAA essential

  • A robust investment approach can help investors to cope with volatility and generate returns in an uncertain investment environment. Volatile markets may also require active management and the use of tactical opportunities within an appropriate SAA.

 

Focus on long-term returns

  • Investors may have to broaden and lengthen their investment horizons to achieve a given level of returns. Use of structured products may be one way of doing this.

 

Use alternative approaches

  • Explore other approaches to increasing potential returns, such as capturing illiquidity premia in private markets for equity and debt.

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Theme 1 – Policy pressures need prudent response

Economic slowdown worries have encouraged central banks to loosen monetary policy again, but many factors that are hurting growth are non-monetary in nature. Even though the effectiveness of monetary policy is nearing its limits, and calls for fiscal stimulus will be more vocal, we don’t anticipate a massive fiscal boost. Political developments will also continue to have an impact on markets.

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Theme 2 – Living with a low yields world

With a continuing policy reliance on monetary “magic”, current financial repression in the form of negative (real) bond yields will continue for some time. Many central banks now own high shares of their countries’ overall debt (in the case of the Bank of Japan, 45%) and winding these holdings down will take time – if it happens at all.

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Theme 6 – Tech meets ESG

Our long-term investment themes, now in their fourth year, target structural, long-term changes in the economic environment. They include Cybersecurity, Millennials and Healthcare (launched in 2017); Infrastructure, Smart Mobility and Artificial Intelligence (launched in 2018); ESG (environmental, social and governance) Investing and Enhanced Infrastructure (launched in 2019). For 2020, we launch two new long-term themes: 5G Fast Forward and Resource Stewardship.

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The end of monetary magic?

Our CIO Outlook for 2020 identifies six themes for investors to consider as the central bank policy of quantitative easing reaches its limits.

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Theme 5 – Politics tops policy

Politicians’ actions are likely to prove particularly important to foreign exchange (FX) rates in 2020, and commodities will feel the consequences too.

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Theme 4 – Balance your style

Equity valuations are stretched going into 2020 and the perceived lack of alternatives will not be enough, on its own, to drive valuations much higher from here. But modest single-digit corporate earnings growth should provide some support and further gains in equities indices look likely.

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Theme 3 – Find new income harbours

The current environment of low or negative (real) yields is likely to continue in parts of the corporate space as well as developed market government bonds. Investors may need to look for income elsewhere, and acceptance of risk will be a prerequisite for positive absolute performance.

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