As global uncertainty persists and the U.S. bull market begins to show signs of exhaustion, equity market volatility is expected to increase in the coming year and stock selection will continue to gain importance, according to Alex Tedder of Schroders.
Global growth has slowed in 2019, which will most likely continue into 2020. Trade wars as well as political turmoil continue, and economic data have deteriorated around the world, led by purchasing managers' indexes from the industrial and service sectors.
Although the U.S. has already cut interest rates three times in 2019, it is one of the few developed economies with room to cut rates further, says Alex Tedder, head and CIO of global and U.S. equities at Schroders. Whether this will ultimately impact growth remains to be seen. In many parts of the world, such as Switzerland, the euro zone and Japan, interest rates are already negative. In the emerging markets such as Russia, Brazil and China, on the other hand, there is the greatest scope for reductions, as interest rates are still relatively high here.
Shift in market focus
In the short term, the momentum of the U.S. economy is likely to remain strong, according to Tedder. "But as we move into 2020, factors such as capacity constraints, higher input costs and deferred investment decisions will create the template for a gradual slowdown." He expects these conditions to be exacerbated by regime change, as a Democratic victory in the fall election could have a big impact on areas such as health care. US profit margins remain at record levels – with the exception of the energy sector – and are likely to trend downwards in the future. "For example, earnings estimates for U.S. companies listed in the S&P 500 still appear to be quite "sporty," averaging +11% year over year, according to Tedder. In economies that are already in or near recession, such as Germany, Japan and the UK, expectations are more subdued. In most countries outside the U.S., he sees no catalysts for a strong upturn in growth.
Global themes offer long-term investment opportunities
Given the uncertainties affecting the global economy, the range of possible macroeconomic outcomes is quite wide. With the S&P 500 having delivered a total return of 250% (in U.S. dollars) over the past 10 years and global equities more than doubling, it seems reasonable for the equity expert to assume more modest equity returns going forward. Against this backdrop, investors may benefit from focusing on a number of broad, long-term global themes that offer significant positive investment opportunities and, in many cases, are uncorrelated with traditional equity indices.
Impacts of climate change problem will show up in significant financial outlays. For example, Alex Tedder estimates that spending on greenhouse gas mitigation will rise to at least $2 trillion per year over the next 10 years. These costs have to be borne by governments, consumers and, of course, companies.
Within the latter group, there will be a significant number of beneficiaries as part of the shift to sustainability, he said. The energy transition process is already well underway, despite rather weak support from many governments, including the U.S. However, economic sense is prevailing, and the overwhelming cost advantage of wind and solar power over traditional generation sources (see chart) is leading to a massive upswing for many renewable energy companies.
Renewable energy is catching up
The picture is similar within the automotive industry. Tedder explains that electric vehicle (EV) sales will increase here over the next few years due to more favorable regulatory environments in many countries, such as.B. In Norway, with a total ban on the sale of new vehicles with internal combustion engines by 2025, increase enormously. However, the demand itself is ultimately determined by the attractiveness of the products themselves. As they improve, Alex Tedder estimates consumers will certainly move to EVs, just as they have adopted email, cell phones or Internet shopping.