2019 Markets
At the back end of 2019, it was double digits that came in most major U.S indexes the rise of the S and P of over 30% that year. As well as a decade without a recession and some of the highest growth in over 100 years in the S and P and Dow Jones. Despite this, it has been a turbulent decade with trade wars politic instability though out the U.S and Europe and tight diplomatic tensions though out the world. Now we look into a new year and decade and what can be expected from the year ahead.
2020 The Year Ahead and How To Balance The Portfolio.
I have read around 40 different reports & analysis across many of the banks that have conflicting options.
Let’s look at the facts. The U.S election, where if the Republican or Democrats win in 2020. Both have come to decide that a trade war, to a lesser extent is needed to combat the U.S deficit with China. As patent rights that China has exploited over the past 2 decades is taking its toll and will holt U.S technological advantages that have been accustomed to having. The patent rights alone some analysis estimate equate to 300 Billion (US) dollars (as of 2019) deposit to the U.S. With an additional trade despite 500 billion dollars (US). Critics will go back to the Smoth Hawley act of 1930 where tariffs were raised from 40-48% which had a detrimental effect on the U.S economy. But personally, think this is somewhat different due to the deposit being inflected although, can’t deny the effect on raising tariffs has on an economy (both U.S and China). I would argue the trade war will continue in 2020, to a lesser degree as both sides. As both sides will want to limit hurting their own economies too much (especially for the U.S in an election year). As have seen in 2019 companies, such as Harley have seen production moved away from the U.S where it is less affected by the increased tariffs this is just one small example of taking jobs and production from the U.S as an effect of the trade war. While the Chinese, fluxion of manufacturing semiconductors and electronics companies in China move south to Vietnam or elsewhere in Asia. It is no doubt the trade war has had a major impact on both countries level of GDP and would want to some sort of an agreement in 2020.
The Fed
The fed lowed the rates 3 times in 2019, the forecast for 2020 is that they won’t lower the rates if a sustained growth rate of 1.9-2.0% GDP is forecast. Rates are as low at can go and would see it a risky move to cut rates in 2020. Although the VIX shows stability, stagnation in the U.S and Europe and political uncertainty still are avid in 2020 to 2021 this does not give much room for stimulation of the economy if rates are cut even more.
Europe
Europe, with the Brexit looking a formidable outcome, with Boris Johnson finally winning a majority, in parliament. It looks that it will finally have some sort of outlook for 2020. Although, negations will still be likely as none of the European council seem likely to give the U.K an offer that they are looking for.
Europe itself looks somewhat a financial risk, with the departure of the U.K in 2020. And Germany looking on the brink of a recession. And other major European countries having their own turmoil (France, Spain, Italy) it looks somewhat bleak for the European mid-cap shares in 2020.
Emerging Markets
The emerging markets, Asian countries look for strong growth with a positive effect from the trade war Vietnam’s growth, is looking for another year of 6.8-7% GDP growth, and will look to be one of the main beneficiaries of the trade war. As well, as this Malaysia, Thailand, and the Philippines in the Asian region. With the main being electronic semiconductors and to a lesser extent gas, with the expected growth of 0.2-1% between the countries.
Brazil over the last quarter of 2019 growth the most it has done over the last two years and looks to continue that growth, in 2020 of an increase of 1.8-2%. While, India still has a growth expectation of 6% a year it is not troubled by bad debt, changing fiscal policy and tension with Pakistan. China will likely be a different story with the trade war showing its impact on an increasing amount of debt, and slower growth even by its own GDP figures (that are unreliable as the way they are measured on a local and governmental level) sees a bleak year. Although, the Chinese economy is changing and in 2020 will become more than ever an innovation center so the prospects, of Chinese patented technology exports and special economic zones of Shenzhen, attracted more innovation, would divert the slower manufacturing sector to assist and try to maintain the GDP growth. As well as the President Xi, has been agreeing closer trade talks with Africa and some of the 1 trillion (US) belt and road countries such as Pakistani (who likely be a good alliance in the region due to the tensions with India) may have some positive effects for an otherwise slowing GDP growth in China as use of cheaper manufacturing labor and exploitation of natural resources.
What portfolio would I look for in 2020 for a balanced portfolio
Disclaimer: this is not advice, this is based on my prediction and opinion of what will happen in 2020
The high PE ratio and ever-growing stocks of the last decade would move more towards, alternatives such as gold and REITs as well as looking at fixed interest over 2020/2021. The bull runs seems at the very least likely to stagnate of the next two years. On equities emerging markets ETFs look positive with Vietnam being my personal favorite with the trade war wins and high growth expectations.
My portfolio for 2020: Type. Percentage. Why
Fundsmith Global Equity
Large cap global equity, 30%. Although the outlook looks dim for large market cap global equity stocks, the intrinsic value of a company will not go away therefor a company that invests in global large-cap equity with an intrinsic value should still see growth still in 2020. And looking to the midterm would outperform the cycles.
Ishare MCIS Frontier
Frontier markets equity 7%. Diversion away from the global equities this is a volatile fund but with an 11% exposure to Vietnam and other frontier markets this is less correlation, from the global trends in turn of a downfall in equities in 2020.
Ishares Pacific Equity ex Japan
Asian equities, 20%. Somewhat less correlated to the frontier and most of the major holdings outside China looking to have positive effects from the trade war as well as stable shares in Australia, that will seek growth in 2020.
Fidelity Global Property International property 16 Exposure to an Alternative to equities in a long bull run, as of the stagnation in growth in 2020 in major countries an increase to borrowing, therefore, increase property development and prices.
JPM high yield bond class
High yield bonds, 15%. Another alternative to equities, with some of the developed bonds looking somewhat slow a global high yield bond looks like an alternative and a defensive risk against the volatility of equities.
SPDR Gold Shares
Alternative, 5%. A gold assets is looking to capitalize on a turbulent 2020 in the equity markets. Ads so-called safe physical assets that many analyses will still strengthen in terms of volatility even with newer alternative asset classes (Crypto).
Cash
Cash, 7%. Waiting for a equity or opportunity in 2020 or 2021.
This is still geared towards equities (57%) as the intrinsic value of global companies should still prevail regardless of the currently high PE ratio and turbulent market conditions outlook. The frontier shares by Ishare of 7% are a risk, as shown but will keep in mind the low correlation that even emerging markets are impacted by major GDP growth or developed market downfall. The Ishare fund also has a broad exposure to markets such as Vietnam. That I think is the gem of Asia.
While an Asia Pacific ex-Japan fund will look to focus on stable markets such a Australia and Asian large-cap share market look to exceed growth from the trade war such as Taiwan and Korean electronics companies while less focused on China stocks.
Summary
A balanced portfolio, with diverse asset classes, should see you through, most market conditions. I would emphasise looking more to the medium term and having a stable portfolio. However, if you did want to rebalance your portfolio in 2020, I would move more from equities and more into alternatives, such as property, commodities, or fixed income as a defensive option. For an aggressive portfolio, I would move more towards, emerging markets (such as India, Vietnam, Brazil) and even frontier markets for a more aggressive portfolio than medium to the large-cap U.S and European stocks.
