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Equity outlook: Market strategists are bullish on 2020

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Equities are expected to return between six and eight per cent in 2020 amid further growth in the global economy. But this depends on the USA’s trade conflict with China and other countries not getting any worse, writes Jan Wagner…

Equities are expected to return between six and eight per cent in 2020 amid further growth in the global economy. But this depends on the USA’s trade conflict with China and other countries not getting any worse, writes Jan Wagner…

On equity markets, it seems that the party never ends. 2019 not only marked the tenth year of a rally in stocks, but one of the best for the asset class. Since January, the closely watched S&P 500 has gained 29 per cent. The gains in other major indices like Germany’s Dax and the MSCI World have, at a respective 25 and 24 per cent, not been any less impressive. 

Corporate earnings were good enough, but a bigger reason why stocks did so well in 2019 was the market’s euphoria over the decision by central banks to keep monetary policy loose. The European Central Bank left its key interest rate at zero, while the US Federal Reserve cut its key rate three times to just above 1.5 per cent. In 2020, market strategists do not expect much more stimulus from the ECB or the Fed. That said, the conditions for another equity rally are quite good. Consider that market players are just awash with liquidity. Should the global economy – and with it corporate profits – remain robust, stocks will again be in heavy demand.
 
Citi Private Bank in New York sees global equities returning between six and eight per cent in 2020 on the back of a seven per cent gain in corporate earnings. Citi also sees earnings per share (EPS) growth for US and global stocks at between four and seven per cent for the year. This scenario assumes modest economic growth and a de-escalation of the trade conflict between the US and China in particular. 

“Our base case is consistent with at least a narrow agreement being struck to avoid tariff escalations in the coming year,” says Steven Wieting, chief investment strategist at Citi Private Bank. Indeed, “our outlook does not require an unwinding of the tariffs and related actions of the past two years. But if such a rollback of trade war did occur, it might provide a significant boost to business confidence, economic activity and EPS,” he adds. 

Stefan Kreuzkamp, CIO at Frankfurt-based asset manager DWS, agrees that the US-China trade conflict will likely not worsen in 2020, as it has already cost billions of dollars worth of exports and as both parties seem to be heading for de-escalation. As a result, the conflict should not put much of a damper on economic growth, which DWS puts at 1.6 per cent for the US and at 0.9 per cent for the euro zone. In this scenario, Kreuzkamp believes that European stocks will do particularly well. 

He says: “Europe’s modest economic growth in 2020 should help cyclical and value stocks, of which Europe has more than the US. Furthermore, the political backdrop appears to be stabilising, which should help spur the interest of foreign investors.” In terms of EPS growth, DWS expects five per cent for US stocks, six per cent for European ones and nine per cent for emerging market ones.

But what stocks are strategists like Wieting and Kreuzkamp focussing on? Wieting replies that at least for the first part of 2020, he favours cyclical and value-oriented equities “as global industrial sectors rebound and investors gravitate more towards goods-producing businesses.” For longer-term investors, Wieting says that high-quality companies that generate solid income are best suited. Another good fit are companies associated with what Citi Private Bank describes as “unstoppable trends.” 

“We have identified unstoppable trends that we believe may bolster a portfolio’s returns, including cyber security, fintech and renewable energy. Leading companies in these areas may be able to generate double-digit revenue and earnings growth for a decade or more,” says Wieting.

For 2020, Kreuzkamp recommends overweighting stocks from IT firms like those involved with cyber security and cloud computing as well as fintechs focussed on payment. He also views certain financials like North American banks and Asian insurers as attractive. “They are trading at relative high discount to the market, although they show good earnings development and are increasing share buybacks,” he says of the financials. On the other hand, the DWS CIO recommends underweighting bond proxies like real estate firms and utilities, as they will lack the headwind of falling bond yields that they had in 2019.

This positive scenario for equities is by no means set in stone. Wieting points out that while there have been moves to de-escalate the trade conflict between the US and China, it continues to be a real risk to economic growth, and by extension, stock prices. At the weekend, the Trump administration is expected to decide whether to go ahead with tariffs on USD160 billion worth of Chinese consumer goods or postpone the move. China has already said that if the tariffs are applied, it will retaliate.

An all-out trade war with China would certainly hurt the US economy and have a negative impact on equity markets globally. Such a development could also weaken Donald Trump’s chances for re-election as US president in November. Market players will, therefore, be hoping that Trump’s obsession with the limelight compels him to maintain a conciliatory stance.

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