Limit investment risk in 2020

The era of hands-on central banks and hands-off governments is set to reverse in 2020, and investors should expect a bumpy ride, as the rate at which risk translates into real portfolio impact increases.

This is the central premise of Principal Global Investors’ Chief Strategist, Seema Shah’s outlook for 2020, in which she outlines the five themes she believes will shape markets, and impact returns for investors next year.

Principal Global Investors® is a multi-boutique firm. It manages approximately $412.7 billion in assets on behalf of over 800 institutional clients located in over 80 countries as well as retirement plans and individual clients.

“Low rates may have saved us from economic disaster, but they have also distorted financial markets, crippled bank lending and threatened pension and superannuation systems worldwide,” Shah said.

“Nonetheless, rates and growth are likely to stay low for the foreseeable future, so the real question is how investors should respond."

Shah doesn’t anticipate a recession in the next 12 months, and expects the global economy to stabilise in early 2020. However, she does not expect a strong enough upturn to stop central banks from maintaining the monetary sugar rush to financial markets.

“Equities have had an amazing run - in part due to the amount of liquidity in the system – so while I expect the cash injections to persist, their diminishing effectiveness means we are likely to see multiple expansion, rather than earnings growth.

“The gap between fundamentals and valuations is already increasing – and although we expect stocks to remain relatively resilient next year, it’s difficult to see how they won’t start to look down with a feeling of rising nausea,” she said.

Shah said she also expects a pendulum swing from momentum to value stocks, and noted that the outperformance of defensive and growth stocks in 2019 is unlikely to continue.

“There’s no reason to dump momentum stocks en masse however, because a fundamental and sustained shift from momentum to value would require a stronger upturn in economic activity than anyone expects in 2020,” she said.

When asked for her asset class picks for 2020, Shah said that the low interest rate environment will persist, and that investors should remain fully invested, actively seeking out opportunities which offer positive returns but also limit portfolio risk.

“A core allocation to US mega cap stocks, a tactical allocation to value stocks, and fixed interest, including convertible bonds and emerging market debt which are both attractive sources of yield.

“I also like real estate as a defensive play – it’s a long-term asset class with different drivers and dynamics to global equity markets and is somewhat sheltered from downside risks.”