As we enter 2020, uncertainty lingers over much of the global economy, but there is one thing the vast majority of investment managers agree on – the UK market is set for a bonanza.
Following the Conservative Party’s decisive general election victory on 12 December and with the UK’s departure from the EU now all but inevitable, UK investors have the one thing they have been constantly clamouring for: certainty.
In a one-off asset allocation survey for the year ahead (conducted before the result of the general election was known), nearly 73% of respondents told us they plan to hold an overweight in UK equities over the 12 months, while only 13.6% were underweight. This is the biggest ever equity overweight seen in our quarterly survey, which began in 2011.
Parmenion senior investment manager Meera Hearnden said: ‘If we finally see clarity over Brexit, then I really believe the UK market has the potential to shine over the next 12 months.’
She agreed with the widely-held view that ‘valuations are low’ for the country, and suggested that there are also ‘some world class businesses which have been caught up in the Brexit debacle’.
Wealth managers bet on post-Brexit bonanza
Robin Amos
ramos@citywire.co.uk
Readers are taking UK equities to record levels for 2020, our exclusive survey reveals
This perspective was shared by Tim Bond, a fund manager at Odey, who said ‘the UK economy should bounce after Brexit, bucking the slower global trend’ as inward investment increases and fiscal easing resumes.
This means the ‘UK may switch from being seen as a pariah to being a safe haven refuge, both geopolitically and economically’, he said.
STOCKS VERSUS BONDS
Readers were positive on the prospects of equities more generally, with 40.9% bullish on emerging markets and 36.4% betting on the US. With the exception of Japan, respondents were more optimistic on the prospects for all regions than in our last quarterly survey in November.
With ‘no signs of any global recession yet’ Raymond James investment manager William Clarkson expected stocks to outperform other asset classes and questioned whether bond yields could go much lower. Courtiers analyst David Nicholsby noted that despite macro headwinds consumer spending has not wavered.
Lombard Odier senior portfolio manager Mike Edlinger said the firm forecasts ‘equities to post positive returns in 2020 with a potential for further market gains if, as seems possible, trade talks progress’.
He added: ‘Although not particularly attractive from a risk/return perspective, guidance for this year is holding up and valuations should stay supported by accommodative central bank policies.’
Against this trend, Bond said that excluding UK domestics – ‘the only market discounting a recession’ – he was short equities, ‘primarily in the US where valuations are very high’. However, he is downbeat on bonds generally as well, as ‘low rates are now having perverse effects on growth, via the impact on household saving rates’.
Fixed income was shunned by readers in general. Almost 42% of respondents were underweight developed world sovereign debt, while 50% were underweight emerging world bonds. Only developed world corporate debt saw significant interest, with a quarter of wealth managers overweight, though a third were also underweight.
With yields seen as likely to remain at historic lows, most said they would be prepared to take little fixed income risk in 2020, with some set to avoid debt altogether. JM Finn investment manager Brendan Company said he is only holding an index-linked allocation, ‘as a hedge against central bank policy error which sees inflation spike’.
Edlinger said that ‘low returns now demand a more active approach’ such as carry strategies, which he believes ‘should perform well in this low yield, moderate volatility environment’. Emerging market corporate debt is also viewed as offering opportunities to discerning investors.
‘We prefer to move down the capital structure into subordinated bonds and hybrids, for example in fundamentally solid companies, rather than compromising on credit quality. We also like corporate sector purchase programme (CSPP) eligible issuers and their substitutes across currencies.’
GLOBAL OUTLOOK
Overall, readers were hopeful in their macroeconomic outlook for 2020, with 43.5% predicting global growth will rise, 4.3% suggesting it will rise significantly and only 8.7% expecting it to fall. This is also reflected in their outlook for corporate profits and inflation.
Investment Quorum chief investment officer Peter Lowman said: ‘If we see some recovery in the global manufacturing numbers and the global consumer remains resolute, then optimism is likely to remain high.‘
In Clarkson’s view, while the US remains ‘strong’ there is ‘no recession on the horizon yet. [This] bodes well for the rest of the world. President Donald Trump is likely to pull a rabbit out of the hat before his re-election’.
Asked whether the world will dodge a downturn, some respondents expressed more concern. Austen Robilliard, head of investments at Murdoch Asset Management, said that though growth should remain positive this year, ‘we are due a recession in the near future’.
SHORT-TERM RECESSION
Alka fund analyst Dharmendra Vekaria anticipates some areas will enter ‘short term’ recessions, while Hearnden said she feels ‘it will be a year of cautiousness as events unfold’.
One person who thought there was a strong chance things could turn bad was Company. He suggested that Audi’s decision to cut 10,000 jobs could be ‘the start of a decline in the German manufacturing economy’, with global repercussions.
The most negative forecast was given by Bond, who said: ‘Once growth slows enough for default rates to increase, corporate bond markets will collapse, removing all support from equities.
‘This is not going to be a shallow recession because financial conditions will tighten drastically. Monetary policy cannot help, because deeper negative rates and lower long-term rates will just boost saving rates further.’
BIGGEST RISKS
Several wealth managers expressed concern over the possible impact of the US presidential and Congressional elections in November. The general view was – as Courtiers’ Nicholsby put it – ‘if the US sneezes, the world catches a cold’.
Readers tended to see the re-election of US president Donald Trump as being the most preferable outcome, at least from an investment perspective, due to concerns over the policies put forward by his Democratic rivals.
For Nicholsby, Trump being elected for another term would not be ‘a major risk to financial markets [however] Elizabeth Warren on the other hand would upset the status quo’.
Mohsin Bukhari, head of investments at Carrington Investments, said: ‘The rhetoric coming out of some of the leading Democratic candidates does not appear to be business friendly.’
According to Bond, the chance of anti-trust legislation being introduced would increase if the Democrats take power, spelling ‘disaster for most large incumbents in most sectors’. However, he also said ‘a Trump win would see more incompetence and chaos from a president untrammelled by re-election considerations’.
Aside from the elections, wealth managers see Trump’s handling of the US’s trade dispute with China as a major risk, with more than half who commented noting this as a top concern. Edlinger said ‘trade is an issue that colours the entire investment landscape’.
Lowman also highlighted ‘an error in central bank policy or a geopolitical event in the Middle East’ as key worries, while Hearnden sees the pressure of rising interest rates on government bonds as a big threat.
In the event that things get nasty, most respondents said they would look to cash, either in addition to or away from gold, in which 38.1% of readers were above the benchmark and 28.6% were beneath.
Company is holding a 5% cash allocation to be ‘ready to react to any downside pressures’, above an average of 3% reported by survey takers.
Bond said: ‘The safe haven is cash, the risk asset is gold.’
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