Five market trends to follow in 2020

1, A rebound for the UK

For once, we agree with the Bank of England! At the BOE’s final meeting of 2019, the minutes of the bank’s December meeting suggests that the Bank is counting on a post-election boost to the economy. This was one of the reasons why the Bank voted 7-2 to leave rates on hold, even though the signals are getting louder that the UK’s economy ground to a halt in the last three months of the year. It remains to be seen how “material” the majority for Boris Johnson’s Conservative government would be on the UK’s economy in the years ahead, however, some growth-positive measures included in the Queen’s speech, which includes slashing business rates by 50% for some smaller businesses including pubs and cafes, are starting to excite investors. Since Boris Johnson’s extraordinary win on December 12th, the FTSE 250, a broad measure of UK companies, has risen some 1000 points. Although this index has not managed to regain the highs from December 13th, we believe that the market is merely taking profit and that this index could be on course for a strong Q1 2020 performance.

Expectations for a rebound for the UK’s economy would also boost sterling, and we believe that 2020 could see GBP/USD finally regain the $1.40 handle, for the first time since May 2018. However, as with all investment predictions, we would caution that UK asset prices may not go up in a straight line. We believe that their performance could be stronger in Q1 compared with later in the year, as the market is likely to get jittery around concerns about a cliff edge for a trade deal with the EU. We remain optimistic that the UK government and the EU will be able to reach a trade agreement before the end of 2020 deadline, as the stakes are high for both economies. However, we can’t rule out that brinkmanship from both sides could rattle confidence in UK asset prices. Even so, we believe that there is plenty of scope for UK asset prices to stage a meaningful rally in the first few months of 2020, with domestic-focussed shares including utilities and consumer stocks included in the FTSE 250, the largest beneficiaries.

2, ESG investing

This is one of our most interesting themes for 2020, and we believe that traders and investors will increasingly looks to gain exposure to companies with positive environmental, social and governance characteristics. We believe that this will enhance the attractiveness of companies with positive ESG profiles, while this theme could weigh on companies that are considered controversial, such as tobacco firms, weapons and firearms manufacturers and some energy companies.

This is already a big theme for institutional investors, and we believe that it will play a big part in retail investing in the coming years. Investors ignore ESG risks at their peril. For example, late in 2019 Moody’s, the credit rating agency, said that it was considering stripping ExxonMobil of its triple A credit rating, flagging risks in its adjustment to a low carbon economy. This is a big concern for ExxonMobil and other oil majors, and it is no surprise that ExxonMobilhas underperformed the US stock market for the second half 2019.

ESG investing does not mean that you have to put all of your faith and money in small, obscure windfarms and solar panel companies, quite the opposite. The MSCI enhanced ESG focussed index, which aims to maximise exposure to positive ESG metrics and reduce exposure to carbon dioxide and other greenhouse gasses, along with companies that are considered controversial, includes some household names. US companies that are included in the MSCI’s ESG index include: Microsoft, Apple, Amazon, Google, Facebook, Johnson & Johnson, Visa and JP Morgan. The inclusion of a bank in this index is interesting, it suggests that JP Morgan is not lending to “controversial companies” including the energy sector, big tobacco and weapons manufacturers. The fact that other banks have not made the cut, suggests that their ESG metrics may not be high enough, thus going forward, companies that are not directly controversial, but have dealings with controversial companies, such as banks and their lending activities, could also find themselves out of favour in an era where ESG investing is king.

In 2020 we believe that traders ignore corporate ESG credentials at their peril.

3, Emerging markets play catch up

Looking ahead into the new decade, one of the key investment themes will be demographic changes across the world. In the West and across developed markets, the working age population is set to shrink, with a 25 million decline in developed market workers, while there is set to be more than 450 million people of working age entering the workforce in emerging and less developed markets. This will boost the investing potential of these countries, for example by boosting corporate profits along with the economies of some emerging markets through higher tax take etc. However, it is not a straight-forward investment theme, as some less developed economies experience more corruption and higher levels of political risk. Due to this, we would suggest that traders who are interested in emerging markets consider getting exposure to larger emerging market indexes, for example the MSCI emerging markets index, as this will help with sector and geographic diversification. It is also worth looking at companies with a large global footprint, as they could also benefit from the demographic benefits of a boost to working age populations in the emerging world. This includes Microsoft and Google, along with Facebook and Apple. Some “local” companies to consider include the Chinese version of Amazon, Alibaba.

4, US/China trade war and de-globalisation

While relations between the US and China have definitely improved in Q4 2019, the “deal” between the two superpowers is still fragile and further delays or retractions could occur. We think that the clock is starting to tick on the signing of a complete trade deal between the US and China, because if President Trump secures a second term in November next year then the motivation to sign a deal, knowing that he cannot run for a third term, could fade. Relations between the US and China could sour considerably in late 2020 if a deal has not been achieved earlier in the year, which would be bad news for global growth as we move into 2021.

If this does materialise then we believe that smaller, domestic focussed stocks could outperform blue chips with large global footprints. Consumer goods, particularly consumer staples, should also benefit. Overall, we believe that unless a trade deal is fully agreed between the US and China in the first half of 2020, the chances of a deal ever getting done will fall dramatically. This is bad news for global trade and global economics, in our view, and could lead to enhanced market volatility and traders and investors taking a defensive stance when it comes to investing in stocks in the second half of 2020, particularly in the lead up to the US Presidential election in November.

You may notice that some other themes that we have chosen for 2020 espouse the investment potentials of large, global companies such as Microsoft and Facebook, Apple etc. We believe that no trade agreement between the US and China would be the most defining trend of next year and could dominate markets if it comes to pass. If the worst does happen, then we believe that traders will need to consider their investments closely. While global firms are likely to come under more pressure generally, some will outperform others. For example, Facebook, who does not trade in China, may outperform car manufacturers who rely on the Chinese market. Thus, if relations between the US and China deteriorate next year, we will all have to interrogate our investing decisions and realise that global behemoths, particularly in the tech sector, are not all made equal.

5, How to trade political risks

A significant number of people that I talk to are worried about the outcome of the US election in 2020. Fears about a hard-left candidate for the Democrats, along with the upcoming impeachment trial for President Trump, may keep the US on tenterhooks in 2020. This is a concern for US traders, especially since US indexes are at record highs as we reach the end of 2019. Big issues that are likely to dominate the US election including environmental concerns, growing isolationism, the US/ China trade deal and how to structure a healthcare system for an aging population. Considering that we don’t even know who the Democratic candidate will be at this stage, we would advise against positioning for a particular winning candidate from the November 2020 election. Overall, we believe that this election year will continue to benefit healthcare providers, and we may see investors reducing exposure to US stocks from Q3 2020 onwards.

While we expect US stocks and indexes to continue to perform well in the first half of 2020, with 2,500 a potential target for the S&P 500 by Q2, we believe that things could get rockier for US stocks as we approach the election, which takes place in November. US stocks have rallied strongly in 2019, even though corporate earnings have declined for three consecutive quarters; however, this is mostly because stock investors love to look to the future, where they believe that corporate earnings will pick up strongly sometime after Q1 2020. Thus, we could see stock prices falling late in 2020 at the same time as corporate earnings are picking up as the political premium for US companies starts to rise.

This article belongs to the 20 trading ideas for 2020 series. Check the full list of 2020 pieces.