No recession and modest equity returns for 2020: Lazard

The global industrial slowdown will find a bottom and there should be modest upside for equities driven by earnings growth in 2020, according to Lazard Asset Management.

The asset manager’s outlook for next year forecasted consumers would remain resilient and fears of a global recession should abate.

Its co-head of multi-asset and head of US equity, Ronald Temple, said investors needed to take stock of the quality of their holdings and focus on valuation and fundamentals such as high returns on capital, strong balance sheets, and robust cashflow.

“We believe this is a market environment in which security selection is likely to be a much more meaningful portion of total returns, as equity market appreciation is likely to be capped in the mid-single digits,” he said.

Lazard noted the key themes to watch over the next year that could present potential headwinds were trade tension impacts, resilience (or lack of) of US labour markets, evolving global technology ecosystems, and US politics.

“We believe investors tend to overestimate the importance of Presidential changes to the overall trajectory of the US economy. Furthermore, it is easy to overestimate the likelihood of large policy changes,” Temple said.

“Technology firms are increasingly finding themselves caught in policymakers’ crosshairs, with concerns over data privacy, global taxation, market power, content moderation and the role of social media in politics.

“As a result, we expect the operating environment for technology companies to be much less certain going forward than in the past.”

In terms of credit markets, Temple said that some managers and investors were feeling pressure to extend duration and take on more credit risk in exchange for higher yields.

“We believe investors should exercise caution as the reward for taking on this additional risk is not necessarily there at current rates. We also see increasing signs of underwriting sloppiness in the US corporate credit universe,” he said.

“We believe the easy money of 2019 is behind us and expect a slow grind higher, which will be driven by earnings growth rather than valuation expansion. As we survey global equity markets, no major market is inexpensive relative to the last 10 years, with the exception of the UK,” Mr Temple concluded.