How should investors be allocating in the current environment? What are the keys to building a diversified portfolio that delivers attractive returns, but remains resilient to a wide range of different scenarios? We reached out to our experienced panel of investment experts across equities, fixed income, property and private markets and asked them to summarize what investors need to pay attention to in the coming year. This is what they said.
Private markets: Nalaka de Silva, Head of Private Market Solutions
Well, over the course of the coming year, we're really going to be focusing on three areas, technology, demography, and sustainability. From a private-equity standpoint, we're looking at how companies are adopting technologies in terms of making them more profitable using digitalisation in many ways. In infrastructure and real estate, we're looking at how demography plays across emerging markets and developed markets. That all plays itself in terms of looking at residential creation, for example, we're looking at climate infrastructure, so the infrastructure that's going to support the economic growth for these countries in the future. Sustainability plays a key part in that over the coming years, and in terms of the world's response to global climate change and looking at its responses around low-carbon transition, and that allows us looking at energy asset specifically and also social infrastructure, which will help also generate potentially long-term growth for our investors.
Politics: Stephanie Kelly, Senior Political Economist
In 2020, in politics, investors really need to be caring about what happens here in the United Kingdom. Because although, yes, the general election has passed, we have a new government, but nonetheless, the Brexit negotiations remains still progressing. If anything, we have a lot of crucial deadlines coming in 2020 the investors should keep an eye on, because progress needs to be made, or we'll have these moments of uncertainty again.
Beyond the United Kingdom, it's going to be the United States presidential election that will drive the day for investors, as it will create uncertainty. Given the leftward shift of the democratic party, and the focus on China, exactly what that means for major sectors in U.S. Markets, including tech, energy, financials, and healthcare.
European Equities: Ben Ritchie, Head of European Equities
The prospects for European equities in 2020 are looking increasingly positive. We see a stabilising and improving macroeconomic environment, where industrial and manufacturing data has stabilised, and is potentially improving. We're seeing, again, better relationships between the United States and China, which is helping from a trade perspective, and it looks like Brexit is finally going to be resolved. And that's setting an environment where investors are becoming increasingly positive on European equities. And we're also incredibly positive on European equities. And we see opportunities in the many world-class companies that operate within the marketplace. We see opportunities within income, where we see high sustainable and growing yield in a market that has a genuine culture of paying dividends. And we see ESG as an area where Europe is truly a global leader, well above many other markets, and it's in those areas which we see opportunities that excite us as we look into 2020.
Infrastructure: Dominic Helmsley, Head of Economic Infrastructure
Well, the two things that really excite me in the infrastructure space as I look forward to 2020 are firstly, the liberalisation of the railway market in continental Europe. This is going to create fantastic opportunities to invest in new passenger trains and freight wagons right across a whole series of jurisdictions in Europe. And secondly, renewable energy. It's a fascinating theme and it's clearly well-established here in the UK, France, and Germany, but there's great opportunities to invest across Siberia, Italy, Central and Eastern Europe. So those two areas really excite me. And of course, what it means is that we are able to offer real benefits to society in terms of cutting carbon emissions, quicker and safer transportation, more efficient energy production, while also offering the potential for robust returns to investors.
Euro credit: Felix Freund, Head of Euro Investment Grade and Aggregate
We are constructive on Euro Credit for 2020, mainly because of three reasons. First of all, the global economy has stabilised, and a positive but low growth environment is positive for our markets. Secondly, the central bank policy of the ECB remains very supportive. We continue to see negative deposit yields, and the ECB will continue to purchase corporate bonds. This drives flows from negative yielding government bonds and deposits into our asset class. Thirdly, political risk will be lower in our view, compared to 2019. The U.S. and China have just agreed on a tentative trade deal, which reduces the risk around growth. And in the UK and in Italy, we have a more stable political situation that should support European credit. So these are the main three reasons for 2020 why we're constructive on Euro Credit.
Global Real Estate, Anne Breen, Global Head of Investment Process & Strategy (Real Estate)
In the year ahead, there'll be some very interesting factors playing out in global real estate. Some of them have already played out in 2019. We expect that to continue. So for example, the decline in retail and less demand for retail space versus the continued growth in logistics and demand for logistics space. I think additionally, we'll see more focus than we have already on climate resilience, the effect of flooding, also generally on occupier wellness and the demand for space with better air quality. I think these factors will play out.
I think additionally, we'll see continued interest in the long durable income that real estate can deliver and the inflation-linked income that real estate can deliver. And I think finally, interestingly, in the UK, we may see some international investors rethink and return to the UK market as we start to see more clarity around about Brexit and the potential implications on the market.
Global Strategy: Richard Dunbar, Head of Macro Investing Research
As we look ahead, we see low interest rates as far as the eye can see. We see low inflation as far as the eye can see. But we also see modest economic growth as far as the eye can see. That combination talks to continuing challenges for companies seeking revenue growth and challenges on our part to find the best companies to pick in that environment. It perhaps also talks to a continuation of that hunt for yield that we've seen over the past few years and perhaps continued enthusiasm for some of the higher yielding areas of the debt market, perhaps emerging-market debt and high-yield debt. But it also talks to care and security selection within these markets. Putting it together, it talks to having a strong view on what one owns and having a very strong view on what that is worth.
Diversified assets: Mike Brooks, Head of Diversified Assets
So our central expectation for 2020 is for low economic growth and low inflation. But there are downside risks to that, in particular US China trade war, or growth slowing and possibly even a US recession. When we look at asset classes, we see government bonds offering very low yield, so potentially very low returns. Equities are on high valuations, which gives risks to the downside there.
Where we see the best opportunities is in diversifying away from some of these mainstream asset classes. For example, in infrastructure and renewable infrastructure in particular, there's a huge demand to build out wind farms, solar farms, et cetera, to combat climate change. Other areas such as emerging market bonds or specialist areas such as healthcare royalties or student accommodation, we think offer the potential for attractive returns. This is all part of building a diversified portfolio that potentially delivers attractive returns and is resilient to a wide range of different scenarios that may play out.
Responsible Investing: Amanda Young, Global Head of Responsible Investment
The big issue for 2020 will be climate change for investors. That's largely because we've got COP, the big annual conference on climate change happening in Glasgow next year, and this will be a significant one from Paris where countries have to commit to reducing their carbon emissions and commit to legally binding emissions. This will have a great impact on most of our investments.
In addition to that, we have to be thinking about sustainable production and consumption. We are using at an unprecedented rate. The companies we're investing in are greatly reliant on natural resources, how they get hold of those natural resources, how they use those natural resources, and how they create business models that are fit for the future in terms of circular economy, reusing, recycling will all be really important for our investments.
Emerging Market Equities: Devan Kaloo, Head of Emerging Markets
I think the outlook for emerging markets in the next few months is pretty constructive. We have growth that appears to have troughed globally, which is good for emerging markets. You have an accommodative Fed, in terms of expanding of its balance sheet, and you have low interest rates across emerging markets, and you seem to have the defusing of political tensions between the US and China, of course, Brexit. So, things look pretty good.
That said, some caution is warranted. Valuations, while emerging markets look cheap versus developed markets, are not cheap in absolute sense. In addition, there is still the potential risk between the US and China, and of course, the US election cycle to get through. And, of course, there is challenges to growth still, despite the improving outlook. So all in all, we would say that we're cautiously optimistic, but do look out for potentially a bumpy ride.
Global credit: Craig MacDonald, Global Head of Fixed Income
Within global credit in 2020, the first theme is returns. We're expecting low returns, unlike the very high returns you got in 2019. Interest rates, we're not expecting to go up. They'll underpin yields, there's no inflation and credit spread's fair, but the return environment's lower.
What does that mean? Well, the second key theme is there will be greater differentiation between companies. In the lowish global growth environment, the weak companies will get weaker and you'll be punished for owning them, and the strong companies will get stronger, and those are the ones you own.
Then the final theme is really within a low returning, low-income environment, don't be forced to chase yield at any cost because actually the cost will be higher. Defaults will rise from a low base, it'll be much more volatility, whether it's politics, clearly you've got the elections, you've got trade. And therefore discipline and a very dynamic approach will protect portfolios and add value.
Emerging Market Debt: Kieran Curtis, Head of Emerging Market Local Currency Debt
In 2020, we think the outlook for emerging market debt will be driven by a small pickup in growth, especially among some of the larger emerging markets. No, this is growth coming from 1% in 2019 up to 2% or 2.5% in 2020. It could be enough for some currency appreciation, but it's unlikely to be enough to drive a pickup in inflation that can hurt bond returns.
We also see value among a number of smaller countries that issue bonds in the US dollar market. Yields on these, in many cases, didn't fall by as much as other parts of the US dollar market in 2019, and we think that makes them great value.