Equity strategy and market outlook – January 2020

In this month’s strategy piece, Alastair believes that at the start of 2020, the biggest risk comes from elevated asset prices. The resolution of the US-China trade dispute and the convincing victory for the UK’s Conservative party in December’s election set markets alight in the closing days of 2019. After a 29% gain in 2019, the median US equity starts 2020 on a forward P/E of 18.4x, close to the top of its range for this cycle. Continental European equities are similarly aggressively valued relative to their own trading range at present. 2019 was a year of unanticipated monetary easing in the US, eurozone and China. Nevertheless, we fear the sweet spot for central bank-linked equity gains may already have passed and survey data on both sides of the Atlantic remain stubbornly weak. In respect of portfolio risks related to coronavirus, in our view the key for investors is to focus on the economic costs of controlling the outbreak, rather than fearing mass panic. A downgrade to Chinese GDP appears likely, in addition to a regional impact. Until cases have peaked, we believe travel and entertainment sectors are at risk of underperformance. A positive qualitative narrative of a broadly defined Trump policy de-escalation in a US Presidential election year is not wrong – but overemphasised, in our view. It is getting worryingly late in the day for any expected recovery in economic activity to become evident in the incoming data. Given such a recovery already appears to be embedded in risk asset prices, we maintain a cautious position on global equities and credit.

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