Most fixed income investments not an alternative
Since the alternatives – typically fixed income investments – provide hardly any return, it will be no surprise if stock markets keep climbing. Few investors want to be left standing in the station as the equities train roars past, but market upturns increase risks of setbacks. Potential for continued share price surges is also limited.
For those still wishing to supplement their equity investments, we prefer corporate bonds with higher risk (high yield) and emerging market (EM) bonds. Both have the potential to provide some ongoing returns, although exchange rate risk in EM investments can be either helpful or harmful.
We expect slightly positive stock market returns
In line with general economic trends, global earnings were adjusted lower and are expected to show zero growth in 2019. Share valuations have thus climbed, limiting upside potential. Consensus forecasts for 2020 global earnings growth are about 9 per cent, but we expect it to be about 5 per cent: still enough for a mild market upturn. Economic developments will determine this year’s stock market mood, probably seasoned with political surprises that can move markets, especially in the short term. We anticipate lots of fluctuations and drama and expect returns well below those of 2019, consistent with earnings growth.
Investment areas with potential
In this issue, we look closely at areas that can show growth regardless which way the economy moves. Our first theme article examines an increasingly scarce resource – clean water
In developed economies we often take access to clean water for granted, but what is the actual situation?
Digitisation has already radically changed our everyday lives. In the last Investment Outlook we described developments in artificial intelligence.
This time we explore two other trends that may be future winners – robotisation and cybersecurity.
Return expectations, %, next 12 months (SEK)
|Advanced economies||7,0 %||14,4 %|
|Emerging markets (local currencies)||7,7 %||14,1 %|
|Sweden||8,0 %||14,4 %|
|Fixed income investments||Return||Risk|
|Government bonds||-0,5 %||1,4 %|
|Corporate bonds, investment grade (Europe, IG)||1,9 %||3,3 %|
|Corporate bonds, high yield (Europe/US 50/50, HY)||2,6 %||4,3 %|
|Emerging market debt (local currencies, EMD)||6,1 %||8,4 %|
|Hedge funds||3,5 %||6,0 %|
Source: SEB, forecasts January 2020
- 2019 was the best stock market year of the decade, despite the marginal change in earnings.
- The global tech sector gained 45 per cent in local currencies.
- In 2020, earnings are projected to increase by more than 9 per cent according to aggregated consensus forecasts. We believe they will be lower: about 5 per cent.
- High valuations will limit potential returns.
- High valuations will increase the risk of setbacks.
- Continued large discounts on cyclical shares.
- The sustainability trend is continuing and growing in strength.
Fixed income investments
- As expected, Sweden’s Riksbank raised its key interest rate while the US Federal Reserve paused after three rate cuts.
- A more positive cyclical outlook and low government bond yields will boost demand for corporate bonds.
- High yield bonds are preferable to government and investment grade bonds, given low absolute return levels.
- Despite several interest rate cuts, bond yields in a number of emerging market countries are significantly higher than in developed markets, making good current returns possible.
- Clear equity, fixed income and foreign exchange market tendencies will provide support for trend-following hedge fund strategies.
- Strong stock markets will create good potential for equity long/short hedge funds.
- Predictable central banks and high risk appetite will create opportunities for macro fund managers.
- Positive performance for underlying asset classes have contributed to positive absolute returns for a majority of hedge fund managers.