When it comes to making asset allocation decisions for client portfolios in 2020 and beyond, are there particular sectors which might offer particular appeal? Ryan Hughes, Head of Active Portfolios at A.J Bell, offers two suggestions where he believes there is value
As we approach the year 2020, we seem to be at an interesting point in the cycle where central banks are trying desperately hard to tip-toe through economic challenges amid a backdrop of political landmines. This time last year, there were few, if any, market commentators who were suggesting that global equities were set to rally over 20% in 2019 and therefore I’m always conscious that trying to make predictions as to what might happen in the next twelve months is a dangerous game.
There’s no place like home
However, that being said, there are certainly areas of the market where I do see opportunities for investment. The most obvious starting point is the most hated developed equity market in the world; namely, right here in the UK. With three years of political and economic uncertainty, international investors have shunned the UK market and the FTSE All Share Index has lagged other major market significantly in local currency terms. The market has polarised into those stocks with overseas earnings boosted by weak sterling whose valuations have gone through the roof and the more domestically focused stocks that have been treated like pariahs and have seen their valuations fall in some cases to single digit price/earnings ratios (PEs).
I fully accept that until Brexit is ‘resolved’ headwinds will persist, but when we know that investors have a propensity to overreact, it seems that valuations of some domestic stocks have just become too cheap. This provides an interesting opportunity once again for investors to look towards value investing as a way of providing exposure to these cheap, unloved companies. Should the political outlook be a little clearer by the time you are reading this – and we can’t take that for granted – we could expect to see sterling bounce. If so, that would be a major headwind for those stocks which have been the winners for the past three years and in turn should boost the more domestically-focused areas of the market as well as the mid and small cap space. As a result, 2020 could see a fairly major shift in the funds that top the performance charts with those that have been favourites up to now potentially languishing much further down the league tables.
Asia holds promise
Another area that looks appealing, albeit on a longer term view is Asian equities. This year has been a challenge for the Asian region with a slowdown in China as the trade war bites, serious unrest in Hong Kong which has dented economic growth and challenging performance in India. However, as the US stock market powers ahead with valuations getting ever more expensive, valuations of Asian equities continue to trade at a significant discount to global equities. The MSCI Asia ex-Japan Index currently trades on a PE of just over 14 while the MSCI AC World Index is on over 18 times, dragged up by the S&P 500 Index on a lofty 22 times earnings.
With those Asian economies still growing strongly, albeit a little slower than previously, relatively low interest rates, more stable central banks than before and inflation under control, the backdrop for the growth remains strong. Add in the well known facts around demographics and a pull towards domestic consumption rather than exports to the developed economies and you have a strong case that the long term prospects for the region are positive.
Inevitably there is still a reliance on overall global growth, but with the IMF predicting growth of around 5%, way ahead of developed markets, the macro picture is well supported. Whilst it won’t be without volatility and bumps in the road, the opportunity to buy into high levels of economic growth at a significant discount to developed markets may prove to be an attractive one in 2020.
About Ryan Hughes
Ryan started his career in 1999 working for an independent financial adviser, progressing to become Head of Portfolio Management at an award-winning advisory firm. Ryan then joined a global asset management firm as a Fund Manager, where he oversaw more than £10bn of multi-asset portfolios and also sat on the investment and global asset allocation committees. After seven years, Ryan joined a small multi-asset boutique managing portfolios for clients all around the world, before joining AJ Bell three years later to help establish our investment capability. As Head of Active Portfolios, Ryan now oversees all actively managed investment solutions and fund research.