Head of Equity Strategy
Summary: The inflation trade is hot right now and this could be a major surprise for equities later this year. But our key convictions this year are that Italian equities will be one of the best equity markets, health care sector will underperform, 5G related stocks will outperform, IPO stocks will outperform in major comeback, a major acquisition in online streaming, sports athletics stocks will outperform, European and EM equities will outperform US equities, massive accounting fraud scandal in Asia, "climate" stocks will explode higher and electric vehicles will have their major breakthrough with Tesla surprising everyone.
The new year is off to a hectic start with tonight’s US attack on Iran’s top military leader raising the stakes in the proxy war between Washington and Tehran. Risk-off has accelerated in the last couple of hours with oil prices higher due to geopolitical risk premium and bonds being bid. But most interestingly is the move in gold up 6% since early December on rising central bank easing expectations and lower real rates. The US attack feeds the “inflation trade” that is clearly in action among large institutional investors. Yesterday, was one of the biggest days in terms of divergence between inflation-linked and nominal bonds indicating that investors are positioning themselves for an inflation surprise this year.
This is a serious risk factor for equities as historically equities decline either due to a recession or sustained inflation lasting over a year; equities actually rise during an initial inflation shock. Rising inflation would be mean higher nominal rates unless real rates go further into negative. If rates rise on inflation then this will have implications for growth vs value stocks and general equity valuation levels. But there are other important factors to watch in 2020 for equity investors. Everywhere you look predictions for 2020 are being published and of course you should not miss our predictions.
So what are our views and predictions on equities for 2020?
Italian equities will be one of the best performing equity markets in the MSCI World Index in 2020 driven by significantly higher equity valuations as earnings growth kicks into gear and Italian banks are lifted due to the success of the ECB’s tiering system on deposits. Italian equities have an attractive 4.1% dividend yield and is valued at a 35% discount to global equities providing meaningful catalysts for good performance in 2020 after being up 30% in 2019.
Technology stocks will continue to outperform the market as the forces from monopoly effects are more powerful than any threat of regulation. Unless real rates and nominal rates rise dramatically this year the technology sector will continue to see the highest growth rate and the best performance. In a low rate environment growth stocks have been the winner and will continue to be. Within our bullish technology call we also predict that one large well-known technology stock will plunge by more than 50%.
The health care sector will underperform in 2020 as the US election approaches. Both the Democrats and the Republicans will try to out-do each other on reforming the broken US health care system. The mere rhetoric in the 2020 election will be enough to increase the risk premium on US health care stocks and thus compress performance.
Companies providing 5G technology or components for 5G will outperform the market as Huawei will lose market share due to US pressure of its allies to cut ties with the Chinese technology company.
IPO stocks underperformed in 2019 but we expect a huge comeback in 2020 as the quality of IPOs will improve. The lesson learned in 2019 is that VC funds cannot float large money-losing businesses with no clear path to profitability at sky-high equity valuations. Hence IPOs this year will be more about profitable businesses and more realistic IPO valuations which will all drive IPO stocks to outperform the equity market.
Online streaming in music and video is raging between the technology giants and we believe we will see a major acquisition in this category in 2020 as the industry consolidates to curtail competition’s painful impact on profitability.
Sports athletics stocks will outperform this year on boost from Olympics, further gains from e-commerce penetration and market share gains from traditional fashion brands as consumers gravitate towards the “sporty fashion look”.
European and emerging market equities will outperform US equities as China’s rebound will positively impact Europe more than the US. Equity valuation convergence and profit growth pickup are also drivers.
We expect a massive accounting fraud scandal in Asia eclipsing the Enron scandal adding further tailwind to corporate governance focus by institutional investors. While a boost to ESG stocks and the framework we believe the ESG hype will fade as “climate” takes over and boost everything that smells of something that can help the environment and the climate.
This year will be the breakthrough year for electric vehicles adding to the earnings disappointments for global carmakers as EV rollouts impacts profitability through lower gross margin and higher depreciation through new large capital expenditures. Tesla’s business performance will crush all the doomsayers in 2020.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
