Why bond yields are the most interesting they’ve been in a decade
Eva Sun-Wai, deputy manager of M&G Global Macro Bond fund, gives us a positive outlook for the...
Having contemplated the outlook for UK equities in 2020 last week, this week we’ve collated the views of a number of Elite Rated managers and company spokespeople. Covering Asian, US and European markets, as well as global bonds, read what they have to say.
Edward Bonham Carter, Vice Chairman, Jupiter Asset Management
“The health of the US economy will have a significant role in determining the next occupant of The White House next year. As in any card game, luck plays its part and Trump is proving luckier than most. While the Democratic rival to Trump will no doubt be able to point to a slowdown in the US economy in 2020, market expectations of a full-blown recession next year may prove overblown.
“US unemployment is at a near 50-year low, and there is still evidence of decent jobs growth even if it has been moderating. Meanwhile, inflation, which was the bane of economic systems in the 1970s and 1980s, has been tamed to such an extent we now find ourselves looking for ways to reflate our economies – unless, of course, you’re Argentina.
“In reality, all these economic reports suggest a global economy that is at a tipping point. Further moderate growth is possible but so is a damaging downturn. In a US electoral year, it is a difficult spot to be in.
“For investors, some comfort can be taken from the historical performance of the stock market in the run-up to a US presidential election. A study of election cycles between 1952 and 2000 showed an investor holding a portfolio of stocks that mirrored the S&P 500 index in the 27 months preceding a US election (from October 1st of the second year of a presidential term to 31st December of the election year) saw significant returns anywhere between 16% and 70% depending on the election year.
“As a useful counterpoint, the same study found bear markets, defined as a decline of 15% or more in the value of the S&P 500, historically tend to happen in the first and second years of presidential terms.”
Toby Hudson Head of Asian ex Japan Equity Investments, Schroders
“The events of the past year or two have made Asian markets feel less bound by economic fundamentals and more hostage to unsettling political developments. Many of the long-held assumptions underpinning our Asian investments – such as the merits of global free trade or the rule of law and stability of Hong Kong – are being radically challenged.
“The ongoing US-China trade dispute has sapped momentum in many regional economies and we don’t expect any major upswing in economic growth as both the Chinese and the US economies are slowing.
“Headline growth in China has slowed considerably in recent years, with nominal GDP now around the 6% to 7% level, compared with between 15% and 20% at its peak. However, there has been a dramatic explosion in the growth of “newer” parts of the economy as the service sector takes over the baton for economic development.
“E-commerce continues to grow many times faster than underlying retail sales. At the same time, sectors such as healthcare, education, travel and leisure now account for a greater share of consumer spending, with growth rates much higher than the wider economy.
“Meanwhile, the “upgrading” trend is set to continue, with Chinese consumers spending more on high-end products. So, even if volumes are not growing as fast, selling prices and margins are being boosted for companies exposed to these trends. With the opening up of the A-share market in the last few years, there are now even more opportunities to gain exposure to these trends and we continue to see China as the most exciting stock picking opportunity in the region.
“With growth subdued and disruption continuing, inflation is likely to remain depressed and interest rates very low. Against this backdrop, equity dividend yields offer attractive returns that are now well above risk free rates in most Asian markets. Pay-out ratios are still fairly modest in many cases, aggregate balance sheet leverage is below international averages and we have not seen returns boosted by buy-backs to the levels seen in the US.
“As a result, there is considerable potential for pay-outs to increase as companies become more willing to distribute surplus case to shareholders. In a low growth world, we are happy to hold stocks where the bulk of the return is likely to come from dividends providing we see the potential for dividends to be sustained or ideally grow.”
James Sym, manager, Schroder European Alpha Income
“As we move into 2020, the big question on every European equity investor’s mind is whether the market rotation that led to value outperforming recently will continue.
“We believe value’s bounce has been positioning-led (because so many investors had previously shunned this part of the market), and now economic data will have a greater part to play. We think we’re at the cusp of a regime change in markets, supported by the shift in mind-set from policymakers as expansionary tax and spending policy is back on the menu.
“One piece of data being corroborated by conversations with company management is that European businesses are spending to a greater degree than in years gone by: the net balance of firms expecting to increase capital expenditure across Europe’s major markets is at elevated levels.
“Meanwhile, the consumer is looking stronger, with wages rising and unemployment falling. The seeds of a European recovery are being sown, with Europeans having a little more money in their pockets.
“Cyclical value looks attractive for a start. This means undervalued stocks that are sensitive to the economic cycle. Our view is that we are at a turning point in the cycle, with a more synchronised global recovery expected in 2020.”
Steve Woolley, manager, Investec Global Special Situations
“We see overall market valuations (and hence share prices) as being the main risk to global stocks, particularly in the US market, and see more opportunities in other regions such as emerging markets, the UK, Europe and Japan, which are cheaper.
“We are long-term investors who have more of a ‘super tanker’ approach to steering from one theme to another but we have positioned our portfolio to benefit from some of the areas of opportunity that we have described, so things like UK domestic stocks, particularly banks and builders merchants; emerging market stocks – we now have an overweight position in emerging markets in regions like South Korea, in Turkey, in the Middle East, and we have a couple of interesting Japanese stocks too.
“We are also underweight the US which, while we are bottom-up investors, is clearly an expensive market, hence we see fewer opportunities there than elsewhere and have positioned our portfolio accordingly.
“Over the long term, we have conviction in our main portfolio themes and think we have chosen stocks that can dig themselves out of their own holes, irrespective of macroeconomic volatility in the short term.”
Jim Leaviss, manager, M&G Global Macro Bond
“If you believe that 2020 is the year for bond ‘bears’ to finally triumph, I think you have to believe that a lot of very long term, established trends are about to come to an end simultaneously. These trends are the ‘secular seven’: demographics; technology’s impact on inflation; independent central banks; capitalism; globalisation, the austerity meme and quantitative easing.
“Some are under threat but not all. The austerity meme, for example, is likely to have turned into a headwind in 2020, with some potentially large increases in government borrowing in prospect. However, starting valuations for “risk free” assets are unattractive, with most developed market government bonds having negative real yields.
“This means that I will end 2019 with an underweight view on government bonds, expecting yields to move higher next year. But on any significant move up in bond yields, I’d want to buy back my gilts, German bunds, US Treasuries and Japanese government bonds, as many of the secular seven trends remain powerful, and there are clearly significant economic and social fragilities in the global system that could trigger further central bank policy moves – both traditional (rate cuts) and extraordinary (rate cuts below zero, more QE) – and a new flight to quality.”