Investors shouldn’t expect the benign conditions of 2019 to stick around, according to investment manager Schroders.
The support of central banks – particularly the US Federal Reserve – meant that the impact of the US-China trade war and Brexit was lessened. But don’t expect that to continue, says Simon Doyle, head of multi-asset management at Schroders Investment Management Australia.
“While we do not expect a recession as a base case in 2020, we do expect volatility to pick up and, as a result, asset allocation will reassert itself as an important driver of active returns,” Mr Doyle said.
“Geopolitics will feature heavily and, when set against optimistic asset pricing, this may test investor resolve. Capital preservation will need to be balanced against opportunistic buying opportunities.”
Despite their low yields, sovereign bonds will be effective hedges against recession.
“Investors should continue to hold sovereign bonds as a hedge, even though yields are very low and the rewards in a steady state environment are likely to be modest,” Mr Doyle said.
“Investors should also consider their overall asset allocation in this low interest rate environment. While we remain attracted to duration for its return potential if and when downside risks to growth unfold, we believe yields could back up from here if manufacturing and global trade improve over the short term. That said, the added uncertainty of the coronavirus means some hedging of bets here is appropriate.”
Mr Doyle believes that investors should be grateful, but not fooled by the strong outcomes of 2019.
“Historically some of the best years for investors are very late in the investment cycle (1999, for example). We would encourage investors to remember the much more challenging environment of 2018,” he said.
“The bull market didn’t end in 2018, but investors did start to price in uncertainty and demand a premium for taking risk in their portfolios. This may provide a better roadmap for the year ahead.”