Joseph v. Amato, President and Chief Investment Officer—Equities
Erik l. Knutzen, CFA, CAIA, Chief Investment Officer—Multi-Asset Class
Brad Tank, Chief Investment Officer—Fixed Income
Ashok Bhatia, Deputy Chief Investment Officer—Fixed Income
Anthony D. Tutrone, Global Head of Alternatives
Macro: “Fiscal Dysfunction” Unmasked
1. Political Risk Moves Into the Driver’s Seat
Political risk and “fiscal dysfunction”—the lack of fiscal policy to match the economic environment—will not be new to 2020. But with a U.S. election added to the mix and central banks less able to mask this dysfunction, next year these risks could emerge as the primary drivers of market volatility and value opportunity.
2. Monetary Policy Reaches Its Limits
Central bank policies face growing skepticism, and in any case there is little they can do to intervene and address the political concerns likely to be driving markets in 2020. Bouts of volatility appear set to continue, then, and they may be more prolonged than we have become used to over the past few years.
3. Another Year Without Recession, But Risks Are Rising
We think the risk of a U.S. or global recession in 2020 remains low-to-moderate, but the probability of recession in 2021 is rising, and there is greater fragility in the world outside the U.S. Markets often discount a recession six to nine months in advance, so the probability distribution of full-year returns for 2020 is getting wider.
4. Look For a Revival in Business Sentiment
“Soft” data such as Purchasing Managers’ Indices have shown business confidence deteriorating out of proportion to the “hard” data. At some point, however, low unemployment, resilient consumer spending and progress on trade could overcome political uncertainty, turn business sentiment around and unleash pent-up investment.
Fixed Income: U.S. Markets and Quality Yield
5. Fed-ECB Rates Convergence Makes U.S. Bonds More Attractive
With the European Central Bank unlikely to go much further negative with rates and the Federal Reserve more likely to cut that hike, hedging U.S. dollar risk will become less costly. The ability to hedge more cos-effectively could encourage flows away from euro and into U.S. dollar bond markets.
6. Bifurcation Continues in Credit
Investors are still stretching for yield, but they are increasingly trying to do so with a measure of “safety.” In high yield, CCC issues have underperformed BBs and that is likely to continue into 2020.
Equities: Volatility and Rotation
7. Longer Bouts of Volatility Will Create Value
In 2019, volatility was caused by growth concerns and quickly calmed by central banks. The political uncertainties of 2020 will take longer to resolve and could trigger sell-offs similar in scale to that of Q4 2018. Against a background of stable economic data these could present prolonged value opportunities at the market index level.
8. Active Opportunities Flow Beneath the Surface
Independent of value opportunities at the market index level, the modest level of broad economic growth will encourage investors to focus more on company fundamentals. A reversal in longstanding trends beneath the surface of the index is also possible: from larger to smaller companies, from growth to value, and from defensives to cyclicals—at stock, sector and regional levels.
Alternatives: Late-Cycle Stars
9. Private Markets Investing Comes Into Its Own
When valuations are full, private markets investing offers more opportunity to enhance a business’s earnings and mitigate valuation risk; it encourages a long-term view that looks through the cycle; and its multi-year investing period means capital gets deployed through a possible future downturn, potentially picking up attractively-valued assets.
10. Volatility Means Rich Opportunity for Liquid Alternatives
A well-diversified set of liquid alternative strategies could help smooth a bumpy ride in 2020. Volatility could feed into uncorrelated returns from niches away from the traditional markets, short-term trading and relative-value opportunities between asset classes or within capital structures.
