The US and most other major economies should avoid a “hard landing” in 2020 with modest upside for equities driven by earnings growth, according to Lazard Asset Management.
In the firm’s 2020 outlook, it is forecasted that while an industrial rebound has yet to be realised, consumers will remain resilient and fears of a global recession should abate.
“We believe the global economic backdrop will continue to be challenging as we enter 2020, with relatively slow global growth, but recession is not our base case. Rather, we believe the global industrial slowdown will find a bottom,” said Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management.
Mr Temple cautioned investors to take stock of the quality of their holdings, with a focus on valuation and fundamentals such as high returns on capital, strong balance sheets and robust cashflow.
“We believe this is a market environment in which security selection is likely to be a much more meaningful portion of total returns, as equity market appreciation is likely to be capped in the mid-single digits,” he said.
What to watch in the year ahead
Despite its moderately positive outlook, Lazard is closely following a number of key themes that could present potential headwinds.
“Factors to watch in the year ahead include trade tensions and their impact, the resilience (or lack thereof) of US labour markets, the evolving global technology ecosystem, and US politics,” Mr Temple said.
“While these are undoubtedly important events, we believe investors tend to overestimate the importance of presidential changes to the overall trajectory of the US economy. Furthermore, it is easy to overestimate the likelihood of large policy changes.”
At a sectoral level, Lazard expects the technology sector to face a number of potential challenges.
“Technology firms are increasingly finding themselves caught in policymakers’ crosshairs, with concerns over data privacy, global taxation, market power, content moderation and the role of social media in politics,” Mr Temple said.
“As a result, we expect the operating environment for technology companies to be much less certain going forward than in the past.”
Rising risks in credit markets
In a “lower for longer” interest rate environment, Lazard believes finding opportunities in bond markets may be more challenging.
“The challenge that investors face at this point in the cycle is weighing short-term performance considerations against long-term investment objectives. The temptation to make decisions based on short-term market dynamics can lead to taking positions that can be very damaging,” Mr Temple said.
He added that some managers and investors are feeling pressure to extend duration and take on more credit risk in exchange for higher yields.
“We believe investors should exercise caution as the reward for taking on this additional risk is not necessarily there at current rates. We also see increasing signs of underwriting sloppiness in the US corporate credit universe,” he said.
Given its view of rates and credit, Lazard is more bullish on equities than credit for 2020.
“We believe the easy money of 2019 is behind us and expect a slow grind higher, which will be driven by earnings growth rather than valuation expansion. As we survey global equity markets, no major market is inexpensive relative to the last 10 years, with the exception of the UK,” Mr Temple concluded.
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