Asset managers seem to agree that they do not expect a recession in the coming year, but they do expect more modest growth in the markets paired with increased volatility—which could shift opportunities to small caps, value stocks and cyclical sectors.
BMO Global Asset Management says that the economic expansion of the past two decades is unlikely to be repeated and that central banks are running out of monetary policy options for the next global economic showdown. The firm’s leaders say that while the U.S. economy has slowed, they do not foresee a recession in the coming year.
In fact, “given the dovish shift of central banks and reasonable corporate earnings,” BMO remains “broadly positive on equities and neutral on government bonds due to stretch valuations and ultra-low yields,” the firm says in its annual Global Investment Forum outlook report.
In its Solving for 2020 report, Neuberger Berman says it expects increased market volatility in the coming year and the possibility for a recession in 2021 and beyond.
Neuberger Berman expects modest economic growth in 2020, and that this will shift investors’ attention “to focus on fundamentals and to look more favorably on smaller companies, value stocks and cyclical sectors. Volatility could lead to vast opportunities for liquid alternative strategies, and full equity market valuations could make private market investing more attractive. In fixed income markets, Federal Reserve and European Central Bank rate convergence may make U.S. bonds more attractive and hedging U.S. dollar risk less costly.”
Right in line with these prognostications, Robert Johnson, professor of finance at the Heider College of Business, says, “While I don’t envision a recession in 2020, sluggish economic growth will likely result in lower corporate earnings growth, and with price/earnings [P/E] ratios at the higher end of historical ranges, there is little momentum for expansions in market P/Es. My belief is that equity markets will see a reversion to the mean, with returns in the low single digits in 2020. Given the historically low interest rate environment, I believe that bond returns will be equally anemic in 2020.”
However, Nany Prial, co-CEO and senior portfolio manager at Essex Investment Management, has a more optimistic outlook on earnings: “The improved growth trends that are beginning to appear in the areas of wage increases, consumer spending, housing and global growth should lead to both increased GDP growth as well as higher overall earnings growth. As a result, we would expect that 2020 will be a year where market progress is driven more by earnings growth, as has been the case since 2009, than by continued multiple expansion.”
Likewise, Richard Saperstein, chief investment officer at HighTower’s Treasury Partners, says that while U.S. equity multiples are elevated, they are supported by low interest rates. As a result, he foresees corporate earnings growth in the 5% to 10% range in the coming year. As well, Crit Thomas, global market strategist for Touchstone Investments, foresees the Federal Reserve continuing to ease interest rates, “giving some comfort for the market.”
And like her colleagues, Prial also expects that the rotation from large cap into less expensive smaller cap will accelerate in the new year. “The spread between growth and value remains almost as high as it was at the end of 1989 and 1999,” she says. “This type of dispersion has historically led to a strong cycle of value outperformance as well as small-cap outperformance.”
Furthermore, Prial points to several sectors, most technology related, where she expects continued growth in 2020 and beyond. These include “sustainable energy solutions; the 5G rollout; automated vehicles, cars and houses; technology solutions to health care problems; personalized medicine; financial technology and housing.” She adds: “As the pace of technological change continues to accelerate, new companies and new opportunities will emerge that can drive growth and provide exciting investment areas for our stock-picking-focused portfolios.”