Asset Allocation
Your top 6 investing questions for 2020 answered
Jody Jonsson
Vice Chair
Rob Lovelace
Equity Portfolio Manager and Chair, Capital International, Inc.
Tim Ng
Fixed Income Portfolio Manager
Darrell Spence

There’s no such thing as a bad question. Especially in a year like 2020 when investors are feeling nervous about the macroeconomic and political crosswinds blowing across the investment landscape.

To find out what questions were on your mind, we polled thousands of advisors who attended Capital Group’s 2020 Outlook webinar. The following six questions were among the most frequently asked. Here’s how our investment team answered:

1. Should I get out of the market during this election year?

U.S. presidential elections have always been contentious affairs. As we get closer to November’s general election, investors can expect divisive political news to increasingly dominate the headlines, unsettling markets. That’s likely to be particularly true this year during a hotly contested Democratic primary season, which officially kicked off February 3 in Iowa.

Investors may be tempted to sit on the sidelines until the smoke clears. Indeed, during previous election cycles investors appear to have done just that, rotating money into money market funds during election years, then moving back into stock funds the following year.

Average net fund flows by year of presidential term (1992–2019). Chart shows average investor fund flows into money market mutual funds and equity mutual funds for each of the four years of the presidential election cycle. Average totals for equity mutual funds include U.S. and international equity funds. Total average fund flows for equity funds and money market funds are $168.4 billion and $36.2 billion, respectively, in the first year after an election; $121.8 billion and $19.5 billion in year two; $120.5 billion and $113.9 billion in year three; and $94.1 billion and $114.2 billion in election years. Averages are for years from 1992 through 2019. Source: Morningstar. Values based in USD.

But is this a winning strategy? History suggests otherwise. In past election years, markets have tended to return to an upward trajectory after primary season. Stocks, as measured by Standard & Poor’s 500 Composite Index, have had negative returns in only two of the last 20 election years (2000 and 2008), and both declines were largely attributed to asset price bubbles, not politics.

“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.”

Bottom line: Investors who look past primary season volatility and maintain a long-term focus can succeed regardless of the election outcome. 

2. Will there be a recession in 2020?

It’s a question that has been on investors’ minds for years now, and for good reason: Recessions can be painful. In 2019, the various twists and turns of the U.S.-China trade war and a buildup in inventories led to a manufacturing slowdown in the U.S., triggering concerns about an imminent recession.

“We have seen a tale of two economies in the U.S.: a weak industrial sector but a reasonably healthy domestic economy, thanks largely to a resilient U.S. consumer sector,” Spence adds.

The manufacturing slowdown and trade war captured the attention of policymakers as well as investors. The U.S. Federal Reserve cut interest rates three times in 2019, and major central banks around the world have taken similarly aggressive action to maintain easy monetary policy.

“It takes a while for monetary policy to have an impact,” Spence explains. “But we are already starting to see some positive signs with a pickup in the housing market. Given the low-rate environment and the health of the U.S. consumer, I believe we are going to see a reacceleration in the economy in 2020, barring some unexpected shock.”

Bottom line: Although recessions are notoriously difficult to predict, easy monetary policy and a strong consumer should keep the U.S. economy on a growth path in 2020.

3. Why should I bother investing in international markets?

For more than a decade the U.S. stock market has outpaced international equity markets by a wide margin, raising persistent questions about whether it still makes sense to invest in Europe, Japan and other non-U.S. markets. However, it’s more important than ever to take a global view of investing, says equity portfolio manager Rob Lovelace.

“Investors should really be thinking of the world as one market today,” Lovelace says. “Where a company gets its mail is no longer a good proxy for where it does business. For example, many European companies are conducting much of their business in the U.S. or China. So it’s important to closely look at where companies generate revenue.”

Think all the best stocks are in the U.S.? Nope, not even close. 74% of the top stocks since 2010 have been based outside the U.S. Chart image shows the number of top 50 stocks each year from 2010 to 2019 year-to-date by company location: Emerging markets (ex China), China, developed international and United States. The index returns for U.S. and non-U.S. in 2010 are 15.1% and 11.2%, respectively; 2.1% U.S. and –13.7% non-U.S. for the year 2011; 16.0% U.S. and 16.8% non-U.S. for the year 2012; 32.4% U.S. and 15.3% non-U.S. for the year 2013; 13.7% U.S. and –3.9% non-U.S. for the year 2014; 1.4% U.S. and –5.7% non-U.S. for the year 2015; 12.0% U.S. and 4.5% non-U.S. for the year 2016; 21.8% U.S. and 27.2% non-U.S. for the year 2017; –4.4% U.S. and –14.2% non-U.S. for the year 2018; 27.6% U.S. and 16.5% non-U.S. for 2019 year-to-date. Sources: MSCI, RIMES. 2019 data as of November 30, 2019. Returns in U.S. dollars. Top 50 stocks are the companies with the highest total return in the MSCI ACWI each year. Returns table uses S&P 500 and MSCI ACWI ex USA indexes for U.S. and non-U.S., respectively.

With the recent dominance of the U.S. market, a look at indexes suggests that non-U.S. stocks offer more favorable risk-return potential than domestic stocks. To be sure, indexes don’t paint a full picture, as differences in return can be distorted by differences in index composition.

Consider that international indexes are often heavily weighted toward companies in the financials and materials sectors, while U.S. indexes are weighted more toward fast-growing technology and health care companies. What’s more, a close look at individual companies reveals that over the last decade those with the best returns were overwhelmingly domiciled outside the U.S.

“I am finding as many or more opportunities outside the U.S. than in the U.S., even though I think overall the U.S. market will be one of the best markets going forward,” explains Lovelace, a portfolio manager for New Perspective Fund®. “That’s why I believe it is so important for investors to change their mindset.”

Bottom line: Many of the best-performing stocks are outside the U.S. each year, so it’s important to stay globally diversified.

4. How will the trade war affect my investments?

The global trade picture improved somewhat at the start of the year. In January the U.S. and China signed a “phase one” trade agreement in which China agreed to buy more U.S. goods and the U.S. agreed to lighten some tariffs on Chinese goods. “Clearly this is a step in the right direction,” says equity portfolio manager Jody Jonsson, who focuses on large, multinational companies for New Perspective Fund. “But we have a long way to go.”

Ironing out more complicated issues such as intellectual property rights, for example, could take many years to resolve. Investors may be growing concerned that a backslide in negotiations or a further deterioration of the global trade landscape could place multinational businesses in jeopardy. “To the contrary, I believe well-managed multinational companies will be able to navigate treacherous waters and succeed regardless of geopolitical headwinds,” notes Jonsson.

Multinational companies have far outpaced the broader stock market with a cumulative total return approaching 900% since 1994. By comparison, the broader market returned approximately 420% during the same period. The FTSE Multinationals Index comprises companies which derive more than 30% of their revenue from outside their domestic region. Data as of December 31, 2019. Sources: Capital Group and Refinitiv Datastream.

In the last 15 years businesses operating in markets around the world have multiplied and thrived, outpacing the broader equity market while adapting to an ever-changing set of circumstances. Many have done so by adopting a multilocal approach, establishing successful operations in markets around the world.

“For the most part these companies are run by smart, tough, experienced managers who have seen all types of trade environments, favorable and unfavorable,” Jonsson adds. “I believe the best-run companies in the world will find ways to win even when governments are trying to rearrange pieces on the chess board.”

Bottom line: Smart companies find a way to thrive, even in a less friendly trade environment. Short-term volatility can be an opportunity for long-term investors.

5. Will negative interest rates come to the U.S.?

For years central banks in Europe and Japan have maintained negative short-term interest rates to help stimulate growth in their economies. Today there are more than $15 trillion of negative yielding bonds in the developed world.

So far the Fed has refused to employ negative rates in the U.S., but with the world remaining in a muted-growth, low-inflation environment, could that policy stance change? What if another recession hits?

Negative rates have been set in markets around the world. Is the U.S. next? Chart shows a line chart of central bank policy rates for the United States, Sweden, Japan, Denmark, euro area and Switzerland. The lines are shown at the start of 2012, when they were relatively higher for most of these central banks compared to today, where five are now at or below zero. The exception is the United States. Source: Refinitiv Datastream. As of January 31, 2020.

“Negative policy rates are, in my view, a remote possibility for the U.S. over the next few years,” says Tim Ng, a fixed income investment analyst. “I think the Fed’s playbook is more likely to follow what was done in the financial crisis: progressively cut rates to zero if needed and use forward guidance as a tool. The Fed could also buy bonds, as we saw with their quantitative easing program.”

Negative yields essentially mean that investors are paying the issuer to hold their money. That generally happens during times of economic uncertainty, when buyers rush to snap up investments viewed as safe havens. While the U.S. has entered a late-cycle environment and some excesses have begun to build, Spence says the U.S., barring any unforeseen external catalyst, should remain on a growth path for the foreseeable future.

Bottom line: With the Fed on hold and the economic growth picture brightening, negative rates are unlikely to surface in the U.S.

6. How should I position my portfolio for 2020?

Uncertainty will likely remain elevated in 2020. In such an environment, investors may be tempted to dramatically reduce stock holdings and shift to bonds. However, patient investors may be better served by maintaining well-balanced portfolios with a mix of global stocks and bonds.

“I suggest that anyone who is managing money make 2020 the year in which you create a new framework for how to invest globally,” Lovelace stresses. “The U.S./non-U.S. construct served us well for 40 or 50 years, but the world has changed. It’s time to think about how to invest in the best companies wherever they're based.”

Bottom line: Diversified, well-balanced portfolios can benefit patient, long-term investors.

Jody Jonsson is vice chair of Capital Group and president of Capital Research and Management Company. She also serves on the Capital Group Management Committee and is an equity portfolio manager. She has 35 years of investment industry experience and has been with Capital Group for 33 years. Earlier in her career, as an equity investment analyst at Capital, Jody covered insurance, U.S. household & personal care, restaurants & lodging and cruise lines companies. Before joining Capital, she was an equity research analyst at Fidelity Management & Research Company in Boston and an officer in the public finance division of Irving Trust Company in New York. Jody holds an MBA from Stanford Graduate School of Business, where she was an Arjay Miller Scholar, and a bachelor’s degree in economics from Princeton University graduating cum laude. Jody is based in Los Angeles.

Rob Lovelace is an equity portfolio manager and chair of Capital International, Inc. He has 38 years of investment industry experience (as of 12/31/2023). He holds a bachelor’s degree in mineral economics from Princeton University. He also holds the Chartered Financial Analyst® designation. 

Timothy Ng is a fixed income portfolio manager with 17 years of investment industry experience (as of 12/31/2023). As a fixed income investment analyst, he covers U.S. Treasuries, TIPS and interest rate swaps. He holds a bachelor's degree in computer science from the University of Waterloo, Ontario.

Darrell R. Spence covers the United States as an economist and has 31 years of investment industry experience (as of 12/31/2023). He holds a bachelor’s degree in economics from Occidental College. He also holds the Chartered Financial Analyst® designation and is a member of the National Association for Business Economics.

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