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2020 Outlook: Mindful of the risks but confident about the opportunities

  • Hamish Galpin

    Head of Small & Mid Cap Equities, International

  • Geir Lode

    Head of Global Equities, International

  • Andrew Jackson

    Head of Fixed Income, International

Three portfolio managers share their views of the coming year.

Andrew Jackson, Head of Fixed Income: And so the train rolls on. 2019 was an outstanding year for fixed income as an asset class with significant potential for alpha and a number of important themes, led by the explosion in negative-yielding assets across the globe and the lowest BBB-to-BB yield differential in history. One might be forgiven for thinking there is nothing left to invest in. We actually see 2020 as rich in opportunities. Years in which there are super normal (more than 1 standard deviation above mean) returns in fixed income are almost always followed by meaningfully positive years. That said, flexibility and caution are the two watchwords we believe will be most relevant as we perceive risk within both the super tight end of the credit spectrum and within private markets. There are few reasons to believe 2020 will either be low volatility (in light of macro risks) or free from defaults, but if we are mindful of those, we feel confident that a good year lies ahead.

Even allowing for value’s recent rally, growth stocks have consistently outperformed value stocks since the financial crisis.

Geir Lode, Head of Global Equities: Exacerbated by U.S.-China trade tensions, Brexit uncertainty, Middle East tensions, protests in Hong Kong and numerous other geopolitical risks and flashpoints, many global economic indicators have worsened. This backdrop has polarized investor sentiment and prompted sharp swings in risk appetite, which may be a signal that the drivers of the current bull market are becoming less sustainable. Even allowing for value’s recent rally, growth stocks have consistently outperformed value stocks since the financial crisis. A market inflection is likely to normalize the relative valuation between the two styles. However, as growth rates decline, the likelihood of smaller interest-rate increases and even additional cuts by central banks could propel markets—and growth—higher.

Hamish Galpin, Head of Small & Mid Cap Equities: Small caps have given up some relative performance this year as the world economy has slowed and the market has become more risk-averse. However, looking at the long term (25 years), small caps are below their trend. Combined with their propensity for growth, which likely will be valued higher in an overall low-growth environment, this puts them in a favorable position. While they are inevitably more risky than large caps, that can be less of a concern for truly long-term investors, who can get compensated for taking the additional risk. Given the diversification benefit that small caps also bring to a portfolio, it’s not hard to see how they have punched above their weight in terms of contribution to returns over time.

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Alpha: This measures a fund’s risk-adjusted performance. It represents the difference between a fund’s actual returns and its expected performance, given its level of risk as measured by beta (see definition of Beta). This difference is expressed as an annualized percentage.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Credit ratings of A or better are considered to be high credit quality; credit ratings of BBB are good credit quality and the lowest category of investment grade; credit ratings BB and below are lower-rated securities (“junk bonds”); and credit ratings of CCC or below have high default risk.

Diversification and asset allocation do not assure a profit nor protect against loss.

Past performance is no guarantee of future results.

Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

Standard deviation is the measurement of the spread or variability of a probability distribution; the square root of variance. It is a simple, symmetrical distribution where 66% of all outcomes fall within +/-1 standard deviation of the mean, 95% of all outcomes fall within +/-2 standard deviations, and 99% of all outcomes fall within 2.5 standard deviations. Standard deviation is widely used as a measure of risk for the portfolio investments.

Hermes Investment Management Limited. Hermes is a Federated Investors company.