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2019 saw a stellar performance by equity markets both in Australia and overseas, while fixed income investors did not miss out either, as falling bond yields led to strong returns.
So what do we think lies ahead in 2020, and what does this imply for potential investment strategies?
Early in the new year, it appears a return to global economic growth is on the horizon, notwithstanding the current ‘blip’ we are seeing as investors attempt to digest the spread of the Coronavirus. The ‘Phase 1’ trade deal between the U.S. and China, combined with rate cuts from central banks around the world in 2019, in our view sets the scene for a recovery in global growth and corporate earnings in 2020.
Locally things look more challenging. Economic momentum in Australia remains weak, and we expect further rate cuts this year and, potentially, quantitative easing (QE) from our central bank.
What does this mean for investors?
Here are five strategies you can consider, which aim to exploit the opportunities and meet the challenges of the 2020 investment environment, as we think it may play out. Of course, you should always consider the suitability of any potential investment or strategy in light of your own circumstances, including tolerance for risk, and as a component of a broader portfolio.
Strategy 1 – Core allocation to U.S. and global stocks for exposure to potential global growth
With their significant global footprints, the large-cap tech companies of the NASDAQ-100, such as Apple, Amazon and Facebook, are well-placed to benefit from a predicted turnaround in world economic growth. These are companies that offer the potential for structural growth, and we think will enjoy continued support from the market.
With their high levels of automation, they’re also likely to be less affected by rising U.S. wages than companies in the service industry, particularly traditional bricks and mortar businesses, with their high labour costs.
The BetaShares NASDAQ 100 ETF (ASX: NDQ) provides simple, cost-effective access to this theme. NDQ returned 38.7% (after fees) over the 12 months to 31 December 2019, and 18.7% p.a. from inception in May 2015 to the end of 2019 (note that past performance is not indicative of future results).
Strategy 2 – Trade a global recovery via emerging markets
During periods of global economic growth, emerging markets (EM) historically have performed particularly well. EM companies currently appear undervalued relative to developed market peers, potentially presenting an opportunity to investors looking to participate in a global recovery.
You can get access either through a broad EM exposure, or by focusing on particular regions or sectors.
The BetaShares Legg Mason Emerging Markets Fund (managed fund) (ASX: EMMG) holds a portfolio of 40-60 companies diversified across markets and sectors.
The BetaShares Asia Technology Tigers ETF (ASX: ASIA) invests in a portfolio of the 50 largest technology companies in Asia (ex-Japan), with a strong tilt towards the large Chinese internet platform companies such as Alibaba, Tencent and others, and companies with exposure to the growth potential of the Asian consumer market.
The BetaShares India Quality ETF (ASX: IIND) provides exposure to a portfolio of large and mid-cap companies with the highest ‘quality’ characteristics in the fast-growing Indian economy.
IMF Economic Growth Forecast: Real GDP 2020
Source: IMF, World Economic Outlook, January 2020. Actual outcomes may differ from forecasts.
Strategy 3 – U.K. equities – in from the cold?
U.K. equities have fallen out of favour in recent years, due largely to concerns around Brexit, and a decade of fiscal austerity. The recent U.K. election result, however, has created a more certain political environment, and cleared the path to a relatively swift Brexit resolution.
As a result of being the ‘unloved sibling’ among developed markets, U.K. equities are currently trading at a significant valuation discount to the MSCI World Index. As at 31 December 2019, they were also offering a dividend yield of 4.7%p.a. – the highest in the developed world1.
We think this presents an opportunity. Investors can gain exposure to U.K. equities through the BetaShares FTSE 100 ETF (ASX: F100), which invests in the 100 largest companies traded on the London Stock Exchange.
Forward P/E: FTSE-100 discount/premium to MSCI World, Jan 2010 – Jan 2020
Source: Bloomberg, BetaShares. Past performance is not an indicator of future performance.
Strategy 4 – adjust exposure away from large-cap cyclicals, in favour of mid- and large-cap stocks with growth potential
Given the anaemic growth of the Australian economy, we expect the RBA to cut the cash rate further in 2020, and to potentially employ QE.
Not all companies would benefit. We think there are negative implications for the profitability of the banking sector, which would feel most of the ‘bad’ effects of lower interest rates and enjoy few of the benefits. The beneficiaries are likely to be mid- and large-cap stocks offering the potential for growth. Companies that source earnings from overseas also should benefit from the weakness in the AUD that is a likely consequence of lower interest rates.
The BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20) provides exposure to a portfolio of the 180 largest companies on the ASX outside the top 20, and has the following profile:
- underweight banks and financials
- overweight growth vs. value
- negative beta to the AUD.
Strategy 5 – Get the right fixed income balance to strengthen your portfolio core
With interest rates at all-time lows, and potentially headed lower, it’s easy to overlook the role of the fixed income component of a portfolio.
However, investors should remember that the ‘income’ part of fixed income is only part of the story – capital returns, diversification and defensive benefits should not be forgotten.
It’s important to get the right fixed income exposure, with an intelligent balance between corporate and government bonds, to provide both attractive yield and defensive/diversification properties.
The BetaShares Legg Mason Australian Bond Fund (managed fund) (ASX: BNDS) provides a balanced fixed income allocation, with around 45% corporate bonds, 40% government bonds, and 15% supranational bonds.
Alternatively, investors can take a more DIY approach, blending the BetaShares Australian Government Bond ETF (ASX: AGVT) and the BetaShares Investment Grade Corporate Bond ETF (ASX: CRED) to create a balanced bond portfolio.
Note: Future outcomes are inherently uncertain and there is no assurance that these strategies will be successful over any time period. Investing involves risk and the value of an investment can go down as well as up.
1. Source Bloomberg, BetaShares. Data as at 31 December 2019. Yield will vary, may be lower at time of investment and does not take into account ETF’s fees and costs.