As we prepare for 2020, we are encouraged by improving leading economic indicators, receding tail risks, and the fact that markets are no longer baking in much central bank support.
- While tail risks could re-emerge, our outlook has brightened enough to consider less defensive positioning, including:
- Equities over bonds
- Within equities, US and Europe over Japan and emerging markets
- High-yield and securitized assets over investment-grade corporates
- Risks include a re-escalation of the trade war, another leg down in global economic data, and US election momentum toward a more progressive Democratic candidate.
Global Equities Outlook: Thinking Rationally About Value, Growth, and Low-Volatility Factors
David Lundgren, CFA, CMT, Director of Technical Analysis
Brian Hughes, CFA, CMT, Derivatives Specialist
Katrina Price, CAIA, Investment Director
Gregg Thomas, CFA, Director, Investment Strategy
Tom Simon, CFA, FRM, Portfolio Manager
Matt Kyller, CFA, Research Manager for Wellington Management
The macro backdrop has been volatile and there is little reason to expect this to change in the coming year.
- The recent cyclical bear market in global equities is showing signs of abating, with market leadership rotating to sectors that tend to outperform in favorable growth and inflation environments.
- Semiconductors and other cyclical groups, along with European stocks (particularly banks), may see continued strength in 2020.
- While complacency bottoms can be tricky to spot, one may be underway in Europe, where implied near-term volatility for equity markets is muted.
- Opportunity exists in value, but fundamentals do not offer a clear “buy” signal.
- Increasing risk in growth stocks may be cause for concern in some regions.
- In regions where low volatility is most expensive, it could offer the most potential to mitigate market drawdowns.
With a growing consensus that monetary policy may have lost its efficacy in generating demand-side inflation, real policy responses to the next downturn would need to come from the fiscal side.
- The global cycle seems to be bottoming—Europe and China are stabilizing, while the US remains resilient.
- Decreased efficacy of monetary policy and a shift toward populism suggest global governments will increase fiscal support for 2020.
- Globally coordinated fiscal spending could help stabilize global growth and extend the current reflation cycle.
- The long-term US-China decoupling dynamic should continue to manifest itself in declining business confidence across multinationals with global integrated supply chains.
- Ahead of the 2020 US elections, rising populism and political uncertainty pose structural challenges to the US dollar and greater risk of market-unfriendly policy outcomes for certain industries.
In 2020, we will focus on several ongoing topics, including board engagement, climate research, emerging areas of regulatory interest, and developments that could meaningfully affect commodities in coming years.
- Board engagement is increasingly important to our investment stewardship and environmental, social, and governance (ESG) research process.
- We expect our research and engagement on the physical risks of climate change to be integral to many more conversations in 2020.
- Emerging regulations related to shareholder rights, human rights, and audit quality are also on our radar.
- We believe ESG and sustainability considerations can create constructive market conditions for commodity fundamentals.
Issuer fundamentals remain strong, interest coverage is near all-time highs, and we believe defaults will remain low.
- Bank loan performance in 2019 was driven by the outperformance of higher-quality BB-rated bank loans, and much of the income came from credit spreads.
- B-rated bank loans appear to be oversold, which sets up the potential for a strong 2020.
- We believe bank loans can earn mid-single digit income and offer the potential opportunity for capital appreciation in 2020.
Important Risks: Investing involves risk, including the possible loss of principal. • Fixed income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Loans can be difficult to value and highly illiquid; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. • Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. • There are risks of focusing investments in securities of companies in the utilities and industrials sectors which may be sensitive to developments in those sectors. • Risks of focusing on investments that involve sustainability, environmentally responsible and climate focus investment criteria may influence investment performance or competing funds expose the Fund to increased risks related to downturns or other adverse developments in that market segment.
The views expressed here are those of Wellington Management. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.