Clarity in a clouded market
How should investors prepare for uncertain markets ahead? Our investment experts answer key questions, from the debate on value vs. growth to structural factors affecting fixed income and the importance of an asset allocation strategy.
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Max Anderl
Max Anderl
Head of Concentrated Alpha Equity and Lead Portfolio Manager
How much longer do you expect the US equity bull market to last?
Predicting recessions is notoriously difficult. However, we see no obvious short-term catalyst that will derail the US equity bull market. The medium-term outlook is dependent on the US/China trade war, economic growth and interest rates. Typically, a build-up of economic imbalances or overly tight monetary policy bring cycles to an end. But both factors are weak this time around: corporates and consumers are relatively cautious and central banks are leaning towards dovish policies.
![portrait of Jonathan Gregory](/ca/en/assetmanagement/insights/investment-outlook/panorama/panorama-end-year-2019/articles/clarity-in-clouded-market/_jcr_content/mainpar/toplevelgrid_1616644720/col1/innergrid/xcol1/textimage/image.580.jpg/1712656351707.jpg)
Jonathan Gregory
Jonathan Gregory
Head of Fixed Income UK, Senior Portfolio Manager
The third quarter of 2019 saw an inverted US yield curve. What does this mean for investors in the coming months?
Bond yields did indeed collapse across the globe in 2019 as fears about trade and a slowdown in China gathered pace. But there are also structural factors at work suppressing longer dated bond yields, meaning investors are probably reading too much into the shape of the US yield curve today. We need to consider the extent to which yields have been lowered by central bank action since 2008. Remember it was an explicit goal of the US Federal Reserve, as part of its quantitative easing (QE) program, to flatten the curve and crowd out investors from government bonds and into more productive areas of the economy. Add to that the strong demand from yield hungry investors from Japan and the Eurozone and you end up with a very flat US curve that, in our view, signals less about the probability of recession and a lot more about the side-effects of QE.
![portrait of Kevin Russell](/ca/en/assetmanagement/insights/investment-outlook/panorama/panorama-end-year-2019/articles/clarity-in-clouded-market/_jcr_content/mainpar/toplevelgrid_857978005/col1/innergrid/xcol1/textimage/image.580.jpg/1712656351887.jpg)
Kevin Russell
Kevin Russell
Chief Investment Officer, O'Connor
Can value outperform growth in 2020?
Although the low rate, low growth macro environment seems set to continue in 2020, recent market performance shows us that this is a consensus view and that the resulting investor positioning in short value and long growth and momentum factors is extreme. While any headline indicating resolution of one of the many macro risks weighing on the market is likely to create squeezes in value and underperformance of growth, we do not expect value to outperform growth in 2020. Slowing economic growth and the reality of how late we are in the economic cycle present a significant headwind for value that will likely be difficult to overcome. Additionally, growth and momentum stocks are typically characterized by differentiated business models and management teams, both of which can drive sustained outperformance over a long cycle.
![portrait of Paul Guest](/ca/en/assetmanagement/insights/investment-outlook/panorama/panorama-end-year-2019/articles/clarity-in-clouded-market/_jcr_content/mainpar/toplevelgrid_1010414174/col1/innergrid/xcol1/textimage/image.580.jpg/1712656352072.jpg)
Paul Guest
Paul Guest
Lead Real Estate Strategist
What changes do you expect to see in real assets in the year ahead?
The shift in monetary policy is expected to have a profound effect on real estate in 2020. Real estate risk premia, reflected in the property yield premium over risk-free rates, have gone from equal to or below long-run averages to on par with or above those averages. Although total returns have deteriorated from their highs in 2015-2016, the level of return is, in our view, still attractive. We believe the sector will continue to attract capital. However this will need to be balanced against a weakening economic outlook, which will likely impact tenant demand and therefore rental growth. We foresee limited capital value growth and returns driven almost exclusively by income.
![portrait of Phil Brides](/ca/en/assetmanagement/insights/investment-outlook/panorama/panorama-end-year-2019/articles/clarity-in-clouded-market/_jcr_content/mainpar/toplevelgrid_890700595/col1/innergrid/xcol1/textimage/image.580.jpg/1712656352252.jpg)
Phil Brides
Phil Brides
Head of Portfolio Management, Investment Solutions
How can a multi-asset approach help smooth returns over the next year?
Since the chastening experiences of the global financial crisis of 2008/2009, investors have become more aware of the potential for sharp and disproportionately large drawdowns from single asset classes. Given enough time, many of these drawdowns will be reversed, but staying fully invested in order to capture the rebound assumes that investors don't have liquidity needs in the interim. Overall we believe that these types of risk are inherent within financial markets, but that investors are rewarded with returns over time by taking on these types of temporal risks.