Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. These developments can focus on asset classes, geopolitical events, or structural issues surrounding particular markets.
Our latest Year of the Rat outlook considers which parts of equities or bonds are likely to be the top performers over the coming 12 months, and what areas of these asset classes might be the best ones to underweight.
What will be the best and worst-performing mainstream assets?
Answer: Best – emerging market equities and bonds; UK equities
Worst – developed market equities; European bonds
One of the most impressive things about 2019 was the strong performance of almost all asset classes, despite a relatively tepid global economy. Most equities rose, as did bonds. And, US Treasuries aside, US-based classes of both saw the strongest performance, with the S&P 500 index returning 22.2% for the 12 months to January 29, the MSCI World Index offering 18.9%, and the iShares Trust IBoxx USD Investment Grade Corporate bond exchange traded fund, the largest such ETF, returned 13.1%.
But many areas of these asset classes are also looking fully valued, to say the least. The price-to-earnings ratio of the S&P 500 is currently about 24.63 times, compared to a historical median of 14.81 times. Meanwhile the performance of investment grade and high yield bonds have led to a narrowing of yields to extreme lows.
That has led to some concern over where further performance is to be had for 2020. While nobody that AsianInvestor spoke to anticipates a recession this year there were also few hopes of accelerating global economic growth, despite a cessation of hostilities in the trade war. The outbreak of the coronavirus from Wuhan in China in late January is likely to act as a further drag and at the very least will tamp down on China’s economic growth for the first quarter.
That leaves a complicated situation for when it comes to predicting the most likely areas of strength for equities. Overall however, a feeling is growing that it’s time for emerging market equities to have its day in the sun (coronavirus permitting).
A feeling is growing that it’s time for emerging market equities to have its day in the sun (coronavirus permitting)
The asset class has generally been an underperformer over the past 10 years, and this continued over the past 12 months, with the MSCI Emerging Markets Index returning around 6.99%. But with developed market equities looking toppish in valuation the asset class looks relatively cheap, and it should remain stable within a steady (if slightly weakening) global economy. Countries like India, Russia and others look relatively appealing.
That said it might be best to focus on non-Latin American equities; the region doesn’t appear to have any strong catalysts to push its resource-dependent economies and its equities might not do so well. China’s equities were also looking pricey, at least until the coronavirus struck. However, if equities fall greatly on the back of its impact, it could offer a buy opportunity.
Emerging market debts also may well appeal, particularly hard currency ones. These bonds already yield more than developed market peers and for that reason alone are likely to draw interest. Investors believe countries with current account surpluses, like Korea, or declining deficits, like Indonesia, are good plays here.
In the developed markets, UK equities and bonds look like another possibility. The UK has seen its performance drag for a long time as the country dithers and delays over Brexit. But with the country officially leaving the European Union on January 31, its course is now set. And there is a feeling that in the short to medium term there will be a period of stability, in which investors can take advantage of quite cheap assets.
The historical average bears this out. The FTSE 100 index returned 7.8% over the past 12 months, while its forward looking P/E valuation was about 15.1 on January 29, around its historical average. For 2020 at least, a post-Brexit rally might become self-fulfilling, as investors seize on the certainty of the country’s outlook and cheaper asset prices to put money to work.
If these are the assets to look out for, what should investors avoid? This is less certain, but as noted, Latin American equities may not impress, and developed market stocks look like they have little more to offer this year. On the debt side European debt is largely negatively yielding, and unlikely to enjoy the fillip it had last year with renewed quantitative easing. It’s also an area to potentially underweight.