Q1 2020 Outlook

Tue 21 Jan 2020

Read our Full Quarterly Outlook

The Power of the Cycle

John Kenneth Galbraith, an irreverent but brilliant economist best known for his work on the Great Crash of 1929, famously lamented about his own profession: “the only function of economic forecasting is to make astrology look respectable”. As always, we toyed with the idea that the first issue of the year would be an outlook of things to come. Nothing turns a page like a heading with “What 2020 brings”, be it in sports, finance or even gossip. And while we all know that by March these outlooks are hardly worth the paper they are printed on, they are still good fun.

However, expectations for entertainment may be more readily fulfilled by watching the next instalment of “The Crown”, Christmas football, or even participating in mind-numbingly silly pub quizzes. By comparison, reading a quarterly from one’s financial planner is a bit of a distance from the dictionary definition of “fun”.

Our clients expect from us serious answers about financially thriving in a world where growth is slow, markets are anything but efficient and resentment about all this rampant.

Having said that, global bond and equity markets are ending the year near all-time high levels, prompted by even more central bank printing, so the question is “how serious are the risks that this will change going forward?”. Our first quarterly of the year will, thus, be to sanguinely tackle our own “Wall of Worry”: An analysis of issues that should worry investors going forward and, more importantly, highlighting those issues which tend to create too much anxiety relative to their probability that they will be important for one’s economic future.

Asset Allocation

Global economic data is mixed. On the one hand, leading indicators and trade indices suggest that the global economic deceleration might be ending, and growth bottoming out, at least for this part of the cycle. On the other hand, manufacturing data persistently indicates contraction, especially in capital goods orders, suggesting that China continues to both transition and slow down, causing ripple effects to its closest trading partners. The US has joined the cohort of large countries which now see their economy slow and is slightly lagging the cycle of others.

Global inflation remains at bay and unemployment in developed markets is near all-time lows, however we could see some pressures ahead as companies eat into their backlogs. Consumption is dented and capital expenditure is suffering.

Risks for growth are persistent

Trade wars, Brexit uncertainty and the Chinese slowdown, along with the fact that the cycle is well into its 10th year, may unnerve investors. On the back of this feeling, central bank accommodation is increasing, along with investor willingness to buy on a dip, despite the Fed pausing rate cuts, as the world’s de facto central bank has increased the pace of QE. This has helped risk assets break new highs, ignoring tepid fundamentals.

Our latest investment committee in January 2020 felt that, although a little more clarity has been achieved (mostly on the Brexit front), the sheer availability of cheap capital and scarcity of risk assets, create favourable demand/supply dynamics for equities. Therefore, we decided to add 2% to our allocation in UK small caps, from cash. We don’t maintain strong geographical preferences at this point, awaiting for more visible catalysts going forward. We still believe that the cycle, for the time being, remains intact despite increasing signs of maturity.