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Equity & Investment Strategy ResearchEquity & Investment Strategy Products: Investment Strategy Weekly, Asset Allocation Quarterly, Politics & Themes, Surveys.
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• What dominates this survey is the unwinding of 2019Q3’s Global Recession scare. Asset allocators stared into the abyss at the end of the Summer before deciding that three rate cuts from the Fed, the restarting of QE, and the prospect of a US-China trade deal was a sufficient policy response. Unsurprisingly, the 13% point fall in the Recession probability over the past three months has had major positive knock-on effects on investors’ expectations for financial markets in 2020.
• However, even though the recession narrative has been dropped, it is not clear what has replaced it. We have moved from a high-conviction to a low-conviction world where the number of strong calls can be listed on the fingers of one hand: (1) don’t worry about inflation, especially in Japan and eurozone; (2) worry less about Global recession; (3) expect stocks to beat bonds in 2020; and (4) be prepared for equity volatility to be higher a year from now. The message is simple: without inflation, you won’t get a recession – so stay overweight stocks versus bonds. The fifth theme bubbling beneath the surface is dollar weakness, with positive implications for Emerging Market assets.
• ASR Cluster Analysis: our panel splits into 4 groups this quarter showing there is less fragmentation of views but more polarisation. The largest group expects an extension of the economic cycle, with recession averted but no strong upswing. Meanwhile the size of the most bearish group who expect a recession has also increased. For them the events of the last quarter have not removed risks to the credit markets and earnings growth, and this is the only group that expects bonds to beat equities. We still have a quarter of the panel expecting a strong rebound in the economy and risk assets to beat safe ones. But only 15% of the panel see a risk of inflation returning in the coming year.
• Survey based on 183 respondents, representing U$4.0 trillion of AUM (Fieldwork: 21st Nov – 5th Dec)
• Recession risk remains elevated. We continue to favour Bonds vs. Equities
• Staying cautious on Credit & Commodities, positive on Cash & Real Assets
• Late-cycle dynamics suggest no 1998-style mid-cycle pause
BONDS: UST rallied this year despite strong equities. Slower growth, contained inflation & central bank easing will support bonds in 2020. Focus on front end UST.
CREDIT: History says US High Yield spreads will go beyond 700bp in a recession. HY will also have to deal this time with changed tax rules and more ‘fallen angels’.
EQUITIES: Our 2020 recession view suggests continued caution on Global Equities. We continue to favour ‘defensive’ factors, sectors and markets.
COMMODITIES: Headwinds may have lessened slightly but growth is unlikely to prove strong enough to support any sustained upside for oil or industrial metals.
REAL ASSETS: Low rates tend to support real assets. We prefer Real Estate to Infrastructure. In Alternatives, more cautious on Private Equity than Hedge Funds.
US DOLLAR: Room to appreciate further vs. EM currencies but less potential vs. EUR & JPY. Broad USD decline needs clear signs of recovery in World ex US growth.
• Our base case = a Tory majority, but hung Parliament is possible
• A Conservative majority would pave the way for more Brexit disruption
• A Labour majority would be a major shock
• A Labour minority government would be constrained by other parties
• But Bank of England mandate could be changed more easily.
• While the S&P 500 is up18% Y/Y, the S&P 600 has lagged - up just 5%
• However, half of the S&P 500 are down -10% vs recent highs
• More than half the small-cap (S&P 600) stocks are down -20% or more• Weak earnings are beginning to impact capex, employment and credit
• European High Dividend stocks exposed to slowing global economy
• High payout ratios leaves dividend growth more exposed than 2012
• Energy & Resources stocks could see recent payout growth reversed
• Cuts not priced in by either Consensus Estimates or Dividend Futures
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