Geopolitical uncertainty, Brexit, China trade and a US presidential election are just a few of the issues weighing on the markets in 2020, but U.S. Bank’s Asset Management Group continues to have a “glass half-full” investment outlook this year.
Why? If you’re a bull, you get it. Last year saw modest gains across most major asset classes after a challenging year in 2018. As we enter this year, central bank policy continues to favour lower interest rates, consumers are still buying, and many analysts see moderate earnings growth continuing.
If you’re a bear, you might need more convincing. Eric Freedman, chief investment officer at U.S. Bank Wealth Management, recently explained the reasons behind his team’s cautiously optimistic view of what’s in store in 2020, which you can read in the following Q&A:
You and your team are expecting modest economic growth in 2020, and you downplayed recession concerns that started popping up in mid-2019. Why do you continue to see the glass half full?
This is an environment where we see economic growth opportunity, even while the global economy is moving away from being synchronised, as it was in 2017 and 2018. We’re now in a multi-speed world and we’re still coming off strong growth. Let’s say if I were running on a treadmill, I was sprinting before and now I’ve turned it down a bit. Portfolios can still deliver solid total returns, with the potential for greater return opportunities in global equities, private equities and less opportunities in traditional fixed income.
Company earnings growth slowed in 2019, while stocks continued to rise. What do you see happening to that gap in valuations in 2020?
What we saw last year was that investors were willing to pay more for earnings even though they showed only modest revenue and no profit growth across most domestic and international indices. We expect companies will report modest revenue and profit growth again in 2020, but investors will continue to pay up for those earnings compared with the other choices they have. It’s a function of where interest rates are globally - lower rates provide opportunities for corporations to be more decisive with capital expenditures, which will feed back into share buybacks and corporate activity, like M&A. We don’t expect people will continue to pay up for flat or negative growth. But we do think more growth is coming, not just domestically but also internationally, that will boost markets.
After three rate cuts in 2019, what do you think the Fed will do this year?
We think they’ll be on hold this year. Central banks will maintain more of that easing bias, if you will, but the US Fed has indicated there won’t be any rate cut changes this year. If we are wrong, it would be one cut versus one increase. We’re definitely of the mindset that because of that easing bias, that’s another pillar behind that glass half-full mantra.
This is a presidential election year, which adds some uncertainty to the markets. How do you see that affecting markets?
We caution investors not to start anticipating events that won’t unfold until November. For example, the capital market viewpoints of who will win in 2016 were firm until polling began to kick in. The general environment of political discourse will pick up in the second and third quarter, and early fourth. Ironically, one of the key elements that tends to determine elections is the economic climate just before voters head to polls. We’re not going to make investment decisions based on political developments unless we see a sea change in the executive and legislative branches. We see it continuing as something of a “frozen” political environment, with a more left-leaning legislature and more right-leaning executive branch. We don’t see a lot of capital movements until the third and fourth quarters when the election will begin to play out, and it’s not something we’d use as a harbinger of election results.
On top of the presidential election, the trade wars haven’t been resolved and the geopolitical uncertainty continues. What kind of advice would you give investors in these volatile times?
I’d say three key ideas: First and foremost, have a plan and stick to it. The second is to be unemotional and to not let impulsive behaviours drive decisions. Third is to stay informed and empowered. We pride ourselves on putting a lot of content out for investors, and if investors have ideas, we want to talk with them about it.
Q&A facilitated by Heather Draper of U.S. Bank.
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