18.12.2019 — Berenberg Outlook 2020: The cycle continues
Hamburg/Frankfurt. Prof. Dr. Bernd Meyer, Chief Strategist and Head of Multi-Asset at Berenberg’s Wealth and Asset Management, has given a cautiously optimistic outlook for the year 2020. Above all else, the high degree of political uncertainty will continue, he says, not least in view of the US presidential elections. Berenberg expects global economic growth to expand slightly in the coming year. Berenberg is forecasting moderate, single-digit growth for equities, as economic recovery was already more or less priced in with the very good year in 2019. Limited growth, low inflation, low central bank interest rates and renewed bond purchases by the ECB will restrict the increase in bond yields. Berenberg predicts that the Dax will be trading at 13,900 points and the S&P 500 at 3,250 at the end of 2020.
However, Dr. Bernd Meyer, Chief Strategist and Head of Multi-Asset at Berenberg’s Wealth and Asset Management, takes the view that the potential for surprises on the equities markets is limited: Political uncertainty will continue, not least due to the upcoming presidential elections in the US. He does not expect any additional assistance from the central banks or fiscal policy. Bernd Meyer says: “The valuation of equities based on the profits widely expected for 2020 already appears ambitious, and the profit forecasts are likely to be reduced even further. Realistically, we consider that profit growth in the mid-single digits will be the best-case scenario globally. This means that the cycle will continue, but the equities market fundamentally only has limited potential.” But with a partial settlement of the trade dispute and improving economic data, equities are predicted to initially continue to gain value, shored up by inflows to equities investments and the typically advantageous seasonal effect. In particular European equities and equities from the emerging markets are likely to benefit from this development. More pronounced overvaluation with a subsequent adjustment is quite feasible, he says. “In addition to the more favourable valuation, the advantage for Europe is that the markets on the continent usually develop better than the rest of the world, and the USA in particular, when the pace of global growth accelerates. This is because of their more cyclical index composition. After years of underperformance, many international investors are also underweight on European equities, meaning that there is potential for market participants to improve their positioning. “We expect the Euro Stoxx 50 to be trading at 3,850 points at the end of 2020. Outside of Europe, we especially favour equities from emerging markets on account of their relative attractiveness or increasing growth edge”, explains Meyer.
Environment of limited growth
Matthias Born, Head of Investments at Berenberg and manager of the Berenberg European Focus Fund, is also looking forward to the new year with confidence. "Our focus on high-quality companies with structural growth should continue to pay off in the coming years. Especially in the current environment of limited growth, it is worthwhile to look at those that can grow significantly faster than the average. There are more of these in Europe than many think. Europe is not only a leader in industrial digitalization, but we also have leading global players in areas such as medical technology and specialty chemicals. In the consumer and luxury goods segment there are many European brands that set the tone worldwide and benefit from the growth of the middle class in China. In addition, some European semiconductor suppliers should also benefit from China's technological advancements. The increasing demand for AI applications and automation is also promoting structural growth here". It is important to look for opportunities across all company sizes. For this reason, a significant part of the portfolio would be invested in hidden champions next year as well. Although these are often less well known than the US technology giants, their growth dynamics are at least as high.
The presidential elections in the US on 3 November are seen as the key source of political uncertainty. Even the primaries on 3 February are likely to sway the markets. If the Democrats put forward a candidate who leans to the left of the political spectrum and they win, the markets could fear a reversal of President Trump’s tax reform. According to Meyer, an analysis of the development of the US equities market after presidential elections since 1928 shows that equities in the six months after the election have performed significantly weaker in the event of such a ‘united’ Congress than when Congress is divided. When the corrective effect of one of the Houses is missing, presidents tend to take decisions that are more extreme and less market friendly. Otherwise the equities market does not develop differently in election years than in non-election years on average. Meyer notes that when a Republican president is in office, the equities market only moves sideways on average in the six months before the election. He believes that this scenario could be repeated in 2020.
In terms of the economy, Berenberg is forecasting marginally higher growth in 2020 but does not see any real indications of a boom – like in 2019, global economic growth should be around 2.4 percent. Berenberg is predicting that growth will slow year on year in the US, China and Japan, while Europe and Latin America should grow at a slightly higher rate than in 2019. Meyer explains that monetary policy and positive market developments in 2019 have ensured that the financial framework improved considerably. This will continue to buoy the economy in 2020. Leading economic indicators are currently confirming this picture, he states. However, the recovery is likely to be moderate at best. Political uncertainty remains high and even the limited stimulus measures in China will be of less help globally than in previous cycles, Meyer says. Furthermore, he feels that the potential for additional monetary policy impetus is limited, and no major changes in fiscal policy are expected either. Base interest rates in Europe (0 percent) and the USA (1.5 - 1.75 percent) are thus expected to remain at the current level over the course of the year. He says, though, that yields can be expected to rise by year end, both in the US (2.2 percent) and in the euro zone (German government bonds: 0.30 percent).
In terms of foreign exchange, Berenberg predicts that the dollar will come under slight pressure at the beginning of the year and the euro will gain in value moderately, as the risks (trade conflict and Brexit) recede and Europe’s economy regains ground. From a charts perspective, the euro / US dollar exchange rate has been running just short of the 200-day moving average since May 2018 with the exception of a very brief interruption. If the exchange rate breaks through the 200-day moving average, however, this could provide the long-awaited signal that the forex market is about to turn around. It is highly likely that the ECB will not introduce any further expansive measures in the coming months, meaning that the euro has already overcome all of the negative effects on the exchange rate. Berenberg expects that the US Federal Reserve will take a moment to structure its monetary policy to be data-driven. Berenberg is forecasting a euro exchange rate of 1.16 against the US dollar at the end of 2020.
As far as bonds are concerned, Berenberg prefers credit risks, i.e. corporate bonds or emerging-market bonds, over the course of the year over secure government bonds with a longer duration, as the Berenberg experts consider that the yields on secure bonds will continue to rise somewhat for the time being. Gold could benefit from an initial weakness in the US dollar and continues to profit from low real interest rates. Also, the central banks in emerging countries such as Russia, China and India are likely to use exchange rate losses to make purchases in order to de-dollarise their reserves. As a result, gold will remain an attractive diversifier in 2020, particularly to hedge against economic policy risks. If the optimistic expectations for the equities market come to pass, industrial metals (in particular copper) will also offer catch-up potential, according to Berenberg.
“Basically there continues to be no real alternative for investors to investing in equities in the medium to long term”, highlights expert Matthias Born. If there is an orderly Brexit and an at least temporary de-escalation of the trade dispute and if the economic data increasingly point toward recovery, then the equities markets will still have some potential initially, with the risk of an accumulation of a more significant overvaluation. After that, and particularly in advance of the elections in the US, there could be some volatile sideways movement. Meyer emphasises: “The focus for 2020 should be on active management, selectiveness and relative positions.”