The investment outlook for 2020 is convoluted. Easing trade tensions and monetary policy point to a late cycle lift for the global economy, however stretched valuations in certain sectors and a reliance on progress in trade negotiations mean impacts could be uneven.
Here we look at 4 investment trends that could play out in 2020.
Europe has been overlooked and undervalued by global investors for years, but this trend could be set for a reversal in 2020. As uncertainty around Brexit decreases, Morgan Stanley is predicting expanding multiples in Europe, which is also the only market where multiple expansion is predicted. Investors worldwide are underweight in European equities following more than a year of outflows from the region, with some inflows starting to be seen.
European exposure can be obtained via the iShares Europe ETF (ASX: IEU). This ETF provides exposure to a broad range of European companies across 16 major developed European markets. The fund tracks the performance of the S&P Europe 350 and has delivered a return of 21.32% in the year to 30 November. Distributions are made twice yearly and management fees are 0.60% per annum.
Across Europe, 26.45% of the funds securities are from the UK, 17.68% from France, 15.44% from Switzerland, and 13.58% from Germany. The remainder were spread across the Netherlands, Spain, Sweden, Italy, Denmark, Belgium, and other locales. Top holdings include Nestle (3.50%), Novartis (2.65%), Roche Holdings (2.45%), and HSBC Holdings (1.73%).
Income and defensive shares
Political uncertainty, economic slowdown, and recession fears mean safe stocks that pay reliable dividends could be in demand from investors seeking refuge in 2020. Quality, however, will be key. In 2019 we saw companies traditionally known for their dividend payments including National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) forced to cut dividends in the wake of disappointing earnings results and regulatory costs.
Investors seeking safety should consider companies that provide vital goods and services that are less likely to see a sudden drop in demand or be the target of political attacks. Large and diversified businesses that operate across multiple markets and/or geographies can offset weakness in one market or area with strength in another. Examples could include large pharmaceutical and healthcare providers such as CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC). Other potential dividend shares include health insurer Medibank Private Ltd (ASX: MPL), and energy provider AGL Energy Limited (ASX: AGL).
Digital dominance and the rise of AI
Bank of America has predicted that the current trade war between America and China will transition into a ‘technology war’ as the superpowers compete to reach technological superiority. Key areas of competition will include artificial intelligence and robotics, Cybersecurity, quantum computing, big data, and 5G.
According to Bank of America, China’s annual mobile data traffic could grow at 56% compared to the 35% growth predicted for the United States. Combined with favourable policies and government backing, Chinese technology companies such as Alibaba and Tencent may be better positioned to take advantage of the artificial intelligence revolution, at the expense of United States FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet). In Australia, Appen Ltd (ASX: APX), which provides training data for machine learning, is well placed to take advantage of this trend.
Robotics and automation is another key theme to watch this in 2020, with the potential to jeopardise up to 50% of jobs worldwide by 2035. The ETFS ROBO Global Robotics and Automation ETF (ASX: ROBO) provides exposure to this theme and tracks the ROBO Global Robotics and Automation Index. The ETF returned were 20.53% in the year to 30 November. Management fees are 0.69% per annum and distributions are made annually.
Holdings are distributed across the United States (44.2%), Japan (22.4%), Germany (9.1%), Taiwan (5.7%), Switzerland (3.4%), United Kingdom (3.3%), China (2.3%), Sweden (2.1%), France (2.0%), South Korea (1.7%) and elsewhere. Top holdings include Brooks Automation (1.84%), Zebra Technologies (1.75%), Krones AG (1.71%), Nvidia Corp (1.68%), Koh Young Technology (1.67%), Fanuc Corp (1.66%), Intuitive Surgical (1.63%), Congnex Corp (1.63%) and Daifuku Co Ltd (1.62%).
According to Morgan Stanley, a better global growth outlook in 2020 may improve the performance of emerging market equities relative to 2019. For 2020, Morgan Stanley have raised their stance on emerging markets from underweight to equal weight, stating:
Emerging market equities typically perform better during periods of global economic re-acceleration and U.S. dollar weakness. As a result, our earnings forecasts suggest growth of 12% for emerging markets in 2020.
Australian investors can access emerging markets via the ASX using ETFs. The iShares MSCI Emerging Markets ETF (ASX: IEM) provides exposure to 800 plus large and mid-size companies in emerging markets. The fund tracks the performance of the MSCI Emerging Markets Index before fees and expenses. The ETF returned 13.95% in the year to 31 October. Management fees are 0.67% and distributions are made twice annually.
The fund held stocks across China (31.78%), South Korea (12.17%), Taiwan (11.88%), India (8.94%), Brazil (7.66%), South Africa (4.65%), Russia (4.09%), and elsewhere. Top holdings include Alibaba (4.49%), Taiwan Semiconductor Manufacturing (4.32%), Tencent Holdings (4.18%), Samsung Electronics (3.69%), and China Construction Bank (1.38%).
The Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE) provides investors with exposure to more than 5,000 companies in emerging economies. The ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index (with dividends reinvested) in Australian dollars before fees, costs and taxes. The ETF returned 26.04% in the year to 31 October. Management fees are 0.48% per annum and distributions are made quarterly.
Assets are spread across China (35.2%), Taiwan (14.7%), India (10.9%), Brazil (8.6%), and South Africa (5.3%). Top holdings include Alibaba (4.10%), Tencent Holdings (3.85%), Taiwan Semiconductor Manufacturing (2.46%), China Construction Bank (1.23%), Reliance Industries (1.06%), and Ping An Insurance Group Co of China.
As uncertainty around Brexit and US–China trade tension recede, 2020 may be a year where sectors of the market neglected over the past few years come to the fore. Yet political ambiguity remains a concern for global markets, particularly in the US.
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Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of Appen Ltd and National Australia Bank Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.