Volatility

Trade wars, Brexit and slowing global growth: Will volatility return to markets in 2020?

The past year has been a complex period, dominated by numerous challenges including the ongoing US/China trade war, protracted Brexit negotiations and slowing global growth.

However, despite the geopolitical and macroeconomic issues facing markets, volatility has largely remained in the background - and investors look set to close 2019 with a cheer.

By the close of November, global equities, as measured by the MSCI World NR Index, were up a robust 24% year-to-date (in US dollars) - far ahead of where the benchmark was over the same period last year.

In fact, most major equity markets look like they’ll close 2019 on a very positive note. Over the same period, the S&P 500 and Eurostoxx 600 indices have respectively delivered total returns of 30% (in US dollars) and 25% (in euro).

Elsewhere, the JP Morgan Global Government Bond Index is up by 6%, while the ML Global High Yield Index has achieved 11% (both in US dollars).

In all, this collective performance marks a significant change on 2018’s results, which suffered in the wake of frequent bouts of market volatility.

Be prepared

But while markets may have been a picture of relative calm during 2019, investors would do well not to take this situation for granted. As we enter the next decade, there is no shortage of issues to contend with. After all, both Brexit and the trade wars have yet to be resolved, and then there is the upcoming US presidential election.

However, we believe accommodative monetary policy and some easing in global economic uncertainty could potentially extend this already prolonged cycle.

Even though there have been concerns – especially when the so-called yield curve inverted earlier this year, historically a recession indicator - we do not believe that there will be a bear market in risk assets over the next 12 months.

Equally, it will likely be very difficult to mirror 2019’s strong investment returns as equity valuations have moved into elevated territory, while bond yields have fallen below the levels they were at the start of the year.

Looking into 2020

While we always take economic indicators into consideration, we need to be careful not to get too caught up in market uncertainties.

The stakes of the US/China trade war are high and there is a danger this stand-off morphs into an all-out economic ‘cold war’. If this occurs, it will undoubtedly play a part in determining the trajectory of the global economy in the medium term.

Next year’s US elections may push President Donald Trump to seek a temporary trade truce, even if this means making concessions. But we are nowhere near a resolution - and we expect a period of economic uncertainty for some time into the foreseeable future. During this time, trade policy is likely to negatively impact growth for the US, China and the rest of the world.

Even so, we are optimistic on equities with a tactical call on cyclical sectors which have strongly lagged. Supportive policy and some hope of resolution on the trade war and Brexit should bolster positive sentiment. Additionally, where there is scope for some upward revision to growth – for example if manufacturing improves in Germany and China, and the UK achieves a workable Brexit deal, we could see an improvement in performance.

Staying diversified

Rigorous security selection remains at the heart of our investment strategy. Despite relatively high valuations, we still believe certain companies are well-positioned for the long term. And we will continue to pick what we see as the industry leaders with robust business models that show strong growth, profitability and cash flow potential.

Recent years may arguably have thrown out the rulebook in terms of market expectations. However, one thing is certain - volatility will not remain dormant indefinitely. As such, we believe maintaining a suitably diversified multi-asset strategy could be the best way for investors, to not only prepare for volatility’s return, but also to tackle it when it does.

Source of market data: FactSet, data as at 28 November 2019

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