Investment Outlook 2020 Investment strategy 2020

Investment strategy 2020

Opportunities in a low-rate world

Now that interest rates around the world have reached record lows or slipped into negative territory, even risk-averse investors will need to buy higher-risk assets to generate positive returns. We see a number of opportunities to generate additional returns without taking on too much risk.

Several macroeconomic developments will drive the investment landscape in 2020. We expect monetary policy to remain accommodative, with the US Federal Reserve (Fed) expected to hold interest rates steady after frontloading several cuts in 2019. This should help sustain economic growth around current moderate levels. Lingering recession worries are likely to recede, as a manufacturing recovery will likely kick in during the first half of 2020, leading to some steepening of the yield curve. 

Do not neglect future inflation risks

The rather moderate growth outlook in itself might not speak for taking much cyclical investment exposure. However, we think otherwise given the very weak or even negative return outlook when investing in cash and low-risk government and investment grade bonds.

One result of the recent annual update to our five-year return outlook for our asset universe is that investors are likely to face very meager returns in low-risk assets going forward. In fact, even traditional fixed income investors risk suffering losses in real wealth due to inflation. 

Measured diversification 

In our view, investors should take risks in a measured and diversified way by applying a multi-asset framework. Such a framework can take advantage of remaining pockets of value in lowrisk markets, while increasing expected returns by investing in equities and seeking out less conventional investments in fixed income. 

While high-grade bonds still have an important role to play in terms of diversifying risk, investors need to look for a broader set of return drivers to achieve positive returns. Within asset-backed credit, we favor the European covered bond segment, which has a high credit rating. For investors who seek a buffer against the negative impact of rising bond yields (duration risk), senior and mezzanine tranches of collateralized loan obligations should be an attractive portfolio addition to partly replace lower yielding short-term bonds.

Lackluster returns for high-quality bonds

Lackluster returns for high-quality bonds

Adding EM bonds

We also believe that investors should add emerging market (EM) hard currency bonds, which offer a similar expected return outlook as more traditional high yield bonds, but at a better rating level. EM local currency bonds could also be an option, though currency risk will require additional attention for calibrating portfolio shares. In general, we think that integrating EM, including frontier markets, into the fixed income part of portfolios also helps enhance diversification within a multi-asset framework.

Equities offer return potential

Equities and alternative investments offer more potential to drive returns. In our opinion, equities offer an attractive expected return advantage over low-yielding bonds. Investors who are more income oriented should favor companies with stable dividends. On a sector level, we prefer IT as one of the few high-growth sectors. We also like financials, as we expect that some improvement in the cyclical outlook will likely trigger further rotation into that sector in the first half of 2020.

Alternative opportunities

Within alternative investments, real estate enables further portfolio diversification and enhances return potential. In multi-asset portfolios, we generally add exposure to hedge funds for diversification purposes. For investors who are willing to commit money over a longer period of time to gain a liquidity premium, private equity offers an opportunity to enhance returns over the long term.