The start of a new year is when many people spring clean the house. Slightly less unpleasantly, it’s also a good time to review your collection of investments. Whether they are clean and well-honed, or a jumbled mess in need of organisation, you might want to consider what assets to include for 2020. Here are a few suggestions to think about.

Message number 1 – diversify

The difficult question of how much money to put into riskier versus safer assets is a matter of personal choice. Some investors prefer to take advice from a financial adviser or consultant. Our message is simpler: in 2020, you will probably need to hold a diversified portfolio. We believe the prospects look reasonable for a selection of equity and corporate bond and real estate markets, and different investment styles. Sometimes a false choice is put forward. Should I buy X or buy Y? Currently, there are growth opportunities, for example, in emerging market and Japanese equities. There are also income opportunities, including emerging market debt and global real estate. Certain sectors such as technology or consumer may offer attractive growth potential, but taking too narrow a focus could well prove risky.

Message number 2 – lower expectations

Don’t expect 2020 to deliver the same level of returns as those seen in 2019. Many equity markets were attractively valued at the end of 2018, as investors priced in a nasty dose of trade war between the US and China. As that risk receded, and as central banks cut interest rates, so markets re-priced and steadily became more expensive. A good illustration would be the European stock market, which rose from 13 times to 19 times on a price-to-corporate-earnings basis over the year.

Slow growth generally means low returns. 2019 should be put into context. It followed a poor year for returns (2018) and a good year (2017). For example, over the past five years, the total return from holding European equities, including the benefit of reinvested dividends, has been about 6-7% per year. This is superior to cash, but with considerable ups and downs along the way.

Message number 3 – US or them?

In terms of country selection, the main choice for 2020 will be how tightly to hold onto the US equity market or how quickly to rotate into other regions.

In terms of country selection, the main choice for 2020 will be how tightly to hold onto the US equity market or how quickly to rotate into other regions. On the one hand, the US is home to the largest technology companies, which are making stellar returns. On the other hand, there are growing questions about the valuations of the US equity market. In recent months, the US dollar has weakened, which is beneficial for (cheaper) emerging market assets. We expect that to continue – as long as the corona virus affecting China is a manageable not a major shock.

Message number 4 – central banks will pass the baton

Pay less attention to central bank governors and more to finance ministers. There will be small interest rate cuts in 2020, especially in emerging markets. However, if we’re right about our economic forecast of a slow-growth world with low inflation, then most central banks will be on hold. It’s more likely that populist pressures will spur governments to stimulate their economies through a mixture of tax cuts and spending increases. Infrastructure and ‘green’ programmes are likely to attract much of this spending. China, Japan and the UK are top of the list, with the debate slowly building across Continental Europe. Such a loosening of the government purse strings would extend the business cycle. In turn, this would embolden investors to extend their time horizons and buy higher-return assets such as equities.

Message number 5 – ignore political babble

Pay little attention to most political stories on the front page – although some may provide short-term buying and selling opportunities for investors who want to be more active. Do pay attention to the US presidential election in November. The outcome could be decisive in terms of which sectors or regions fare well in 2020 and, more so, in 2021. If Mr Trump wins again, expect more trade tensions with the EU, which runs a large trade surplus with the US. If a Democrat wins, especially Elizabeth Warren, then expect much more regulation, especially for key sectors such as technology, energy and finance.

To sum up: diversify after the good returns of 2019, look for attractive valuations in a world of expensive assets, focus on three-to-five-year and not one-year returns, plan when to buy emerging market assets and pay more attention to what finance ministers do in terms of taxes and spending announcements. 

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