Mixed signals for investors entering 2020

17 January 2020

Investors have been receiving mixed messages from key market analysts as they move further into 2020 with some suggesting that market highs have not yet been reached while others are suggesting caution and the embrace of more defensive investment strategies.

Robeco strategist, Peter van der Welle is suggesting that despite the highs already reached, global equities may have some upside left while, by comparison, Trip3 Partners chief investment officer, Simon Ho, is urging a defensive stance in the face of geopolitical uncertainty generating a spike in volatility.

Interestingly, both van der Welle and Ho are as one on the factors giving rise to volatility, but the Roebeco analyst is arguing that equity market highs have not yet been reached because of the “dovish” approach being maintained by the central banks.

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“Bull markets typically die because euphoria is eventually stymied by central bank overtightening,” van der Welle said. “While we see pockets of exuberance, central banks appear unwilling to take the proverbial punchbowl away. Although inflation could prove to be a market risk in the second half of 2020, it is unlikely to reverse the rising tide for risky assets just yet.”

 He wrote that a significant reason to be optimistic was ‘the skew’ – a phenomenon seen in stock markets going back to 1900.

“Global equities have on average posted annual returns of 8% since then. But the historical return distribution is highly skewed; returns of more than 20% in a calendar year have occurred 20% of the time since the turn of the 20th century. “

However, Ho said the exceptional 10-year bull run coupled with lingering geopolitical uncertainty was likely to generate a spike in market volatility over the coming 12 months and demand a more defensive investment strategy.

Ho referenced volatility as recorded via the VIX - a real-time market index that measures the market's expectation of 30-day forward-looking volatility calculated from the price inputs of the S&P 500 index options as a measure of implied volatility, market risk and investor sentiment.

He said implied volatility was muted in 2019 by historical standards, and the VIX finished the year at 13.7 – although it did experience a high of 28 just after the new year (as a comparison, the VIX hit an all-time high of 80 in 2008 and its long term average sits around 16).

“It was surprising that US equity markets continued to rally during 2019 and the question is whether markets would continue their run into 2020,” Ho said. “A 20% rally in US equities was unusual considering the Quantitative Easing (QE) program has been in place since 2008 and markets have been bullish during this time, but US interest rate policy has been buoying the market.”

As a result, he believes the market is due for a turning point in 2020 as the growth numbers don’t justify the market rally of the past two years, in particular.

 “People have effectively been borrowing money for free, and when that gets taken away, there’ll be some issues. A 10 year bull market by definition has to stop at some point,” Ho said.

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