2020 Outlook: Seek balance amid political and economic risk | Capital Group Canada | Insights

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ARTICLES  |  DECEMBER 2019

2020 Outlook: Seek balance amid political and economic risk

Featuring
Mike Gitlin, head of fixed income
Rob Lovelace, equity portfolio manager
Darrell Spence, economist

Heading into 2020, investors are concerned about the U.S. presidential election, U.S.-China trade war, Brexit drama and more. Our investment professional shed some light on how to maintain balance amid uncertainty.


Key takeaways:

  • Investor patience is a virtue in volatile U.S. presidential election years.
  • International stocks appear attractive on a company-by-company basis.
  • Consider upgrading bond portfolios as rates stay lower for longer.


U.S. outlook: Maintain balance in this election year

Heading into 2020, there is little doubt that politics will dominate the news cycle. For investors, U.S. presidential elections often bring heightened market volatility, especially during the rough-and-tumble primary season. Add that to the U.S.-China trade war, the U.K.’s Brexit drama, slowing global economic growth, civil unrest in Hong Kong, impeachment proceedings in Washington D.C., and you’ve got a classic “wall of worry” for markets to climb.

On the surface, the 2020 U.S. presidential election would appear to be a highly consequential event with major implications for the U.S. economy and markets, not to mention the rest of the world. However, history suggests that may not be the case. U.S. markets have consistently trended upward after presidential elections, generally rewarding patient investors — regardless of who occupies the White House.

“U.S. presidents get far too much credit, and far too much blame, for the health of the U.S. economy and the state of the financial markets,” says Capital Group economist Darrell Spence. “There are many other variables that determine economic growth and market returns and, frankly, presidents have very little influence over them.”

"As we move into the new year, I think we will start to see some improvement in U.S. economic growth, helped along by easy monetary policy,” Spence continues. “But I don’t think the winner of the next U.S. election, whether it’s a Democrat or a Republican, will have much of an impact beyond the usual short-term market gyrations."

International outlook: Consider a borderless approach

Investors who are worried about political risk in the U.S. might want to look overseas for a broader set of investment opportunities. Not because international stocks have any less political risk, but because the world has changed dramatically under the influence of free trade, global supply chains and the rapid growth of multinational corporations.

From an investment perspective, national borders are  no longer as relevant as they used to be. Many companies headquartered in Europe, for instance, derive much of their revenue from the U.S., China or Latin America.

“Where a company gets its mail is not a good proxy anymore for where it does business,” explains Rob Lovelace, a portfolio manager on Capital Group Canadian Focused Equity FundTM (Canada).

Moreover, many of the best stocks each year are found outside the United States. If you look at individual companies instead of index returns you’ll find that the companies with the highest annual returns each year were overwhelmingly located outside the U.S. In 2019, 44 of the top 50 stocks were based on foreign soil. Investors who opted not to go outside the U.S. missed a shot at those companies, many of which are small- to mid-sized firms with potentially faster growth opportunities.

Fixed income outlook: Think about upgrading your bond portfolio

Over the past year, the bond market has reminded investors that not all is well with the global economy. Central banks around the world have cut interest rates aggressively in a bid to offset the negative effects of U.S.-China trade tensions, persistent deflationary pressures and slowing growth in China, Europe and elsewhere.

In the U.S., an inverted yield curve has suggested that a recession may be looming. In Europe and Japan, negative interest rates have spread like wildfire — with more than US$15 trillion of bonds trading at negative yields.

In such uncharted waters, it may be time to think about upgrading bond portfolios as a counterbalance against periods of equity market volatility, says Mike Gitlin, head of fixed income at Capital Group.

“In an extraordinary market like this, balance is essential,” Gitlin stresses. “Amid unusual market trends and mixed economic indicators, a strong core bond allocation may be your best defence.”

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2020 Outlook: Key takeaways


Stay balanced in a U.S. election year

  • Patient investors can do well in U.S. election years. We looked at every U.S. election since 1932 and found that primary seasons are volatile, but markets have notched solid gains afterward.
  • Recession in 2020? Not if the consumer stays this strong. In the U.S., consumer strength should continue to offset a manufacturing slowdown caused by trade uncertainty.

Consider upgrading your equity portfolio

  • The best offence is a good defence. It’s not too soon to prepare portfolios for rougher seas as we face headwinds from a U.S. election year and a slowing global economy.
  • Look for sustainable dividends, not just “value” stocks. The value label can be misleading; it’s not always defensive. Consider selecting companies with the potential to maintain dividend payments in tough times.

Think about upgrading your bond portfolio, too

  • Consider revisiting your bond allocation. Given the late-cycle U.S. economy and weakness abroad, we think a fixed income allocation should be mostly core bonds that can help mitigate stock market volatility.
  • Explore complementary assets to high-yield corporates. Emerging markets bonds have offered similar after-tax income potential — often with lower correlation to equities.

 

About

Mike Gitlin Head of Fixed Income

Mike is a partner at Capital Fixed Income Investors, chairs the fixed income management committee and serves on the Capital Group management committee. He has 25 years of investment experience, four with Capital. Mike was previously the head of fixed income and global head of trading for T. Rowe Price. He has also held positions with Citigroup Global Markets, Credit Suisse Asset Management and George Weiss & Associates. Mike earned a bachelor's from Colgate University.

Rob Lovelace Portfolio Manager

Rob Lovelace is an equity portfolio manager as well as vice chairman of Capital Group and president of Capital Research and Management Company, Inc. He is a portfolio manager of Capital Group Canadian Focused Equity FundTM (Canada). Rob has 33 years of investment experience and is a CFA charterholder.

Darrell Spence Economist

Darrell R. Spence is an economist and research director with 26 years of investment experience. He earned a bachelor's degree in economics from Occidental College. and is a CFA charterholder.


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