January 2020

For those regularly following the news, you will have likely seen many headlines about several financial firms expecting stock market gains in 2020. The Bank of America, for instance, has stated that it expects “higher U.S. yields and a softer dollar”, whilst Barclays has predicted “positive, if modest, returns in major asset classes”. Several market commentators point to 2019 as an (overall) strong year for global stocks and anticipate this upward trend to continue.

As Financial Planners, we have a careful balance to strike. On the one hand, we don’t want to over-exaggerate some of the risks posed to investment portfolios in 2020. On the other, we would caution against much of the over-optimism exhibited in the press. There are reasons to be positive, and reasons to include defensive assets in your portfolio.

2020: reasons to be sceptical

One should always be wary when it seems that all financial “experts” are converging around a prediction about what will happen in the stock markets. Remember, in the final quarter of 2018, the US and global stock markets missed their targets considerably, with almost £4.8tn wiped off the stock market. Following this steep decline, professional investors overwhelmingly predicted that 2019 would see performance continue downwards. As mentioned above, this turned out to be false. Most of the major indexes (e.g. the S&P 500 and FTSE 100) rose respectably, or even by as much as 27%.

At the moment, a large number of professional investors seem to be “riding on the high” of 2019, expecting strong growth from riskier investments such as US tech companies. However, there are good reasons to avoid impulsively piling all of your capital into stocks at this time, avoiding other asset classes. Including at least some level of protection (e.g. defensive, fixed-income assets) is important to help shield your portfolio in case 2020 does not transpire as these optimistic forecasters expect.

Here are just a few reasons to be sceptical about sky-high stock market gains in 2020:

• The US-China trade war, which is taking centre-stage to many macro forecasts. For the last 18 months, these two major powers have been imposing tariffs on each other’s goods, escalating from $34bn US tariffs in July 2018 to $200bn in May 2019. Despite the welcome news that a tentative “phase one” agreement has been reached, tariffs will stay in place for many goods for the time being and it remains to be seen how this will impact various industries (e.g. manufacturing) and the wider global economy in 2020.
• The UK’s withdrawal from the EU, currently scheduled for 31st January. The possibility of a “no-deal” Brexit still appears to be on the cards, with Prime Minister Boris Johnson insisting on not extending the time to agree on a new UK-EU trade deal beyond December 2020 (whilst the EU claims this is not enough time).
• Increasing tensions in the Middle East, which have the potential to dampen sentiment and potentially lead to higher Oil prices.

2020: reasons to be optimistic

It is not all bad news, however. In its assessment for market outlook in 2020, Deutsche Bank argues that periods of high stock market growth (e.g. 2019) are usually followed by modest growth, not steep falls. Whilst this does not guarantee, we will avoid stock market volatility or decline in 2020, it should help caution anyone against spiralling into panic.

Moreover, remember that almost half of the world’s global capitalisation emanates from the US, so investors should take some encouragement from the fact that America’s economy remains quite strong as we enter 2020. GDP is still growing (although more slowly than in some previous quarters), and fears of a US recession seem to have lowered at the time of writing.

(The US-China trade war remains a concern for investors. However, recently there do appear to be some signs of progress. In the latter part of 2019, China agreed with the US to roll back some of its tariffs, totalling as much as £280bn on its imports (e.g. electrical appliances).)

Another interesting development across the world is that many governments are now regarding monetary stimulus as decreasingly effective. The result? Political leaders are starting to turn their attention more towards fiscal expansion. Prime Minister Boris Johnson, for instance, was recently elected in December 2019 partly on a platform to increase public spending (e.g. £34bn more for the NHS per year by 2023-24). Although it is not guaranteed, higher public spending does tend to accompany higher inflation, which benefits shares over fixed-income assets such as bonds.

At this point, you might still feel like you have no certainty over what will happen to stock markets in 2020, and that’s the point. Nobody has a crystal ball on these matters, and so it’s vital to ensure your portfolio is well-constructed and prepared for different scenarios. Diversifying appropriately across different funds and asset classes will be key, as will following good investment practices such as investing for the long-term and avoiding impulsive decisions.

If you need to discuss your investment strategy or financial plan with an experienced member of our planning team at FAS, please give us a call.

With Brexit now looking almost certain to go ahead on 31st January 2020, many people are wondering what the impact might be on their investments. For those concerned about possible volatility or decline, it can be tempting to consider other, less “risky” asset classes in a preemptive attempt to try and shield your portfolio.

Whilst we would caution against making rash, ill-informed decisions about re-constituting your portfolio, it can certainly help to be aware of how fixed-security asset classes work, and how they might be appropriate following discussion with your financial planner. In this short guide, we will be sharing a brief outline on one of these types of securities (i.e. bonds), and how they might be important in 2020.

An overview of bonds

Bonds are actually quite a simple concept. It’s a similar dynamic to when you go to your local bank branch and ask them for a loan. If they agree to give it to you (say, £10,000), then you will be obliged to pay this amount back over an agreed period, with interest.

With bonds, however, you (i.e. the investor) are the loan provider and it might be a company, or government, which agrees to borrow money from you. Specific names are often given to different types of bonds. For instance, UK government bonds are often called “gilts”, whilst “corporate bonds” refer to bonds issued by companies to raise capital.

Bonds in 2010, and looking ahead to 2020

Many market commentators have noted that the 2010s saw a lot of interesting behaviour in the bond markets. In 2016 following the Brexit vote, in particular, investors witnessed government bonds across the world (possibly as much as 30% of the total bond market) produce negative yields. A similar thing happened in 2019 during the summer, where $17trn-worth of government and corporate debt produced negative returns. Historically speaking, this is quite unusual and it happens when an investor (e.g. you) buys a bond for more than its face value. If the interest due over the lifetime of the bond amounts to less than what you originally paid for it, then it produces a negative yield, effectively translating into lost money.

Looking ahead to the 2020s, however, many market commentators are speculating that this era of ultra-low yields may be coming to an end. Sweden has recently abandoned negative interest rates, for instance, recognising that they cause issues for the wider economy. The final quarter of 2019 saw steady growth in bond yields. However, it’s important for financial planners to advise clients that speculation is always dangerous. Nobody knows what will happen in the UK and the global economy in 2020. Much hinges on the precise form Brexit takes, and whether the EU and UK are able to negotiate a satisfactory trade deal and avoid a “no-deal” scenario.

Why include bonds in a portfolio?

Every investment portfolio will, of course, be different depending on your financial goals, interests, stage of life and risk tolerance. That said, bonds are often a feature within a portfolio recommended by a financial planner, to a greater or lesser extent.

The fact is, risk is built into the nature of money, wealth and investing. Opening yourself up to the possibility of greater financial reward usually means accepting a greater level of risk. Holding cash savings is typically seen as one of the lowest-risk options available to you, but in today’s world of low interest rates, it usually results in capital erosion over time (once inflation is taken into account).

Bonds and other fixed-interest investments are commonly seen as the next step up from cash. Investing in UK government bonds (gilts), for instance, is likely to be less risky than investing in company stocks within a fund, yet the potential returns are also likely to be lower.

Where bonds can really add value is by acting as a “buffer” within your portfolio. Bonds are often classed as “defensive” assets because they tend to experience less volatility than other assets, such as property or stocks. They are also deemed less risky because companies tend to pay out income to bonds before they pay out to shareholders. Bond payouts take particular priority over shareholders if a company goes bust.

Suppose the UK experiences an economic slowdown. Quite often, this tends to lead to lower inflation, which can make bond income more compelling. Such a slowdown also can lead to lower company profits and return on the stock market, which can push up the value of bonds even further. Moreover, if the stock market takes a dive then fixed-income securities such as bonds can provide a powerful hedge within your portfolio, shielding you until market recovery.

These can all be powerful reasons to consider including bonds within your portfolio, but it’s important to understand the downsides too. Remember, if the market believes interest rates are likely to go up then this tends to result in a reduction in the value of existing bonds (which have lower rates). On the other hand, if market expectation is for interest rates go down then any bonds you hold are likely to go up in value.

If you are interested in discussing your savings or investment strategy with one of our financial planners at FAS, then please don’t hesitate to contact us to arrange a meeting.

This content is for information purposes only and does not constitute investment advice or financial advice.