Equities A bird’s-eye view on major markets

A bird’s-eye view on major markets

USA: Expect outperformance despite hurdles

Since the start of the bull market in March 2009, the S&P 500 has outperformed other markets by large margins (around 210% vs. MSCI EMU and around 245% vs. MSCI Japan). Our base case presumes continued strong performance of the US market due to superior economic growth and the strong weighting of the IT sector. But its potential is limited by growing margin pressure as a result of rising wages, the waning effects of the 2018 corporate tax cuts, a less supportive Fed and, possibly, uncertainty surrounding the presidential election.

Eurozone: ECB support versus trade war

Considering the political worries and weakness in manufacturing, Eurozone equities held up surprisingly well in 2019. The move back to monetary easing and the associated weakening of the EUR no doubt provided support. However, measured in USD, the market underperformed the S&P 500 by 4.3%. Looking into 2020, we believe the market should be supported, among other factors, by the European Central Bank’s accommodative monetary policy, a likely resolution of Brexit, and its undemanding valuation. The biggest risks are a potential escalation of the US trade war with China and potential US tariffs on European autos.

UK: Look beyond Brexit

The UK market underperformed global equities quite significantly in 2019. However, this was not primarily due to Brexit uncertainty but rather a result of weakness in the materials sector, which makes up a large share of the UK equity market. Looking into 2020, we believe the market will be among the weaker ones as continued sluggish growth in China continues to weigh on materials. A smooth Brexit would paradoxically add to pressure on export-oriented sectors as the GBP would likely appreciate significantly. However, it would support domestically oriented smaller companies. In the unlikely event of a hard Brexit, we would expect decisive easing by the Bank of England and a much weaker GBP.

Switzerland: Steady as she goes

Swiss equities continued to show a very strong performance in 2019, driven in part by the market’s consumer staples giant. Our outlook for 2020 suggests a steady but not spectacular performance, as the defensive Swiss market would underperform more cyclical markets if global manufacturing improves. If successful, efforts by the Swiss National Bank to prevent CHF appreciation would be supportive. A weaker CHF in combination with a steeper yield curve would in particular support financials. A shift in US healthcare policy following the 2020 US presidential elections poses a certain risk to Swiss pharmaceuticals.

China/EM equities: Trade war de-escalation is key

Emerging market (EM) equities have underperformed developed markets substantially since early 2018. Initially, tightening Fed policy weakened a number of markets that are reliant on cheap USD funding. Matters worsened with the start of the US-China trade war – note that China and other northern Asian markets make up more than 55% of the MSCI EM index. A de-escalation of the trade war would thus likely support EM equities, even if other factors such as weaker growth in China may dampen the recovery. Lower inflation and easier monetary policy should continue to support EM such as Brazil.

Japan: Hoping for an improvement in the IP cycle

The past year was disappointing for investors in Japanese equities as the domestic as well as the global economy slowed amid the US-China trade dispute. For 2020, we think this market’s fortunes should improve, as a pick-up in the global IP cycle and a recovery of capex spending in particular will benefit the cyclical Japanese market more than most others. Moreover, the market is attractively valued, with a forward P/E of just above 13 times. The Bank of Japan’s commitment to maintaining an accommodative stance and limiting JPY appreciation is also a positive.