What we think

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.

Over the past three years, equity markets have mainly been driven by “growth” stocks (those thought likely to grow faster than the market as a whole), supported by the “magic” of low interest rates. By contrast, there has been little contribution from “value” stocks (those trading at a low price compared with their apparent fundamentals). Now, however, we believe that the valuation spread between the two styles may be approaching its peak.

Dividends – as both a return contributor and a cash flow generator – should not be neglected. Dividend yields, which are higher than bond yields in many developed markets, can continue to justify the higher risk associated with equities and can also be important for income generation.

What we suggest

Robust equity diversification

• The case for real assets is intact over the longer term and this could be a transition year. In early 2020, style and regional rotation will become increasingly obvious, and robust portfolio construction remains key.

Revisit “growth” versus “value”

• Consider a more balanced style in terms of your “growth” versus “value” positioning for 2020. Some “quality” value stocks could provide real opportunities.

Look for defensive value and predictable cash flows

• We see opportunities in industrials equities globally in 2020, in both absolute and relative terms. Investors should focus on expanding sustainable dividends – those that can be paid from income and without threatening a company’s balance sheet.