Main asset classes Focus on growth sectors and dividends

Focus on growth sectors and dividends

Despite numerous headwinds, the MSCI World Index provided investors with a total return of just above 20% in the first ten months of 2019, well above an average year’s return. We expect a more muted performance in 2020 as global central banks dial back interest rate cuts.

Sector views image
Sector views image

In 2019, the negative impact that diminishing growth momentum had on equities was more than offset by the significant boost that lower interest rates provided. In 2020, we expect economic growth to stabilize. We expect central banks will only provide limited additional support, though liquidity conditions should remain accommodative.

The US Federal Reserve (Fed) in particular will not lower interest rates, in our view, or at most by very little, in contrast to what the market currently expects. In addition, margin pressures are likely to increase as labor costs rise. This suggests that equity returns will likely be more in line with an average year. 

Positive base case for equities 

Nevertheless, our base case for equities is positive. As geopolitical tensions moderate and the trade war subsides, at least to some extent, business sentiment should improve and contribute to a recovery in industrial production (IP). Additional fiscal spending, especially in Europe, and the after-effects of monetary easing in 2019 should also support economic and sales growth. Finally, relative valuations still clearly favor equities. Growth-oriented sectors and stocks that benefit from sustained long-term societal changes should continue to outperform. Stocks that provide stable dividends are also favored. 

Watch the margins

Since the financial crisis, corporate profits have generally been boosted by subdued costs. While some cost drivers will remain at bay, others will not. Interest costs will remain very low for the foreseeable future and may even decline as maturing debt is refinanced at lower rates. Wages, however, have been growing faster in developed countries, particularly the USA. 

The increase in the share of wages is a typical late-cycle phenomenon that should last for some years even if the economy entered into recession. Moreover, while productivity growth has increased, it is unlikely to fully offset these additional costs. Rising labor costs could lead to reduced cash flows. When combined with already extended financial leverage, this could limit stock buybacks, which have been an important driver in recent years. 

The X Factor: US presidential election 

The run-up to the 2020 US presidential and congressional elections in November 2020 could also have a meaningful impact on equity markets, though there is no hard and fast statistical evidence that equity performance in an election year differs from other years.

What may be different this time around is that the election year could be more turbulent than usual given the deep split in the US electorate. Moreover, if polls shifted clearly in favor of one of the left-leaning Democratic candidates, some sectors exposed to potential future intervention (e.g. healthcare, energy or financials) could come under pressure.

Shares of profits after tax and labor compensation in US national income (in%, 4-quarter moving average)

Profit share likely to drop further as labor catches up

Shares of profits after tax and labor compensation in US national income (in%, 4-quarter moving average)

Finding returns in a low-yield sea 

Despite our expectation of mid-single-digit equity returns in the year ahead, returns are likely to be significantly higher than for investment grade bonds. Stocks of companies that offer sustainable dividend payouts should be well supported. 

Based on today’s equity prices, we expect a dividend yield for the MSCI World aggregate of roughly 2.5%. Some sectors such as financials, energy or utilities should continue to pay above-average dividends. 


More growth-oriented investors may consider high-conviction sectors or themes that are likely to experience strong earnings growth. One such area is education technology, which is on the cusp of high growth as education is becoming increasingly digital and therefore more cost-effective and impactful. 

Separately, sustainability is becoming more important not only for consumers and companies, but also for investors. We believe that we are at the start of a transition to a more sustainable economy. While some companies and sectors may come under pressure, significant new opportunities should arise. Our five high-conviction Supertrends touch upon these and other highly relevant topics – please refer to page 40 for details about them.