Investment banks expect stocks to continue to perform strongly in 2020, telling clients to keep more equities in their portfolios than bonds, cash, or other assets.
“Stocks are expected to outperform bonds handily in 2020 as the global economy bottoms out in the first quarter, while monetary policy remains accommodative,” Bank of America said in an outlook note to clients.
2019 was a surprisingly strong year for equities, thanks to US president Donald Trump’s December 2017 tax cuts, which spurred stock buybacks, and unexpected interest rate cuts from central banks around the world.
The MSCI World Index (MWLZ19.NYB), which tracks more than 1,600 large listed companies across 23 developed markets, has risen over 20% since the start of 2019, after a down year in 2018.
Most analysts don’t expect this rate of growth to continue, but expectations are that equities will continue to outperform other assets in 2020.
“We have a constructive outlook for stocks in 2020,” Frédérique Carrier, head of investment strategy at RBC Wealth Management, said in a note to clients.
“Corporate earnings will increase, as will dividends and buybacks, pushing share prices higher, which should transform the gloom of 2019 into a less fraught outlook for the economy and stock markets.”
Global growth is expected to remain weak next year but the continued low interest rates should provide support. Investors and analysts expect interest rates to stay where they are for most of 2020 and this ‘loose’ monetary policy makes corporate debt more affordable. That means businesses can continue to borrow and spend, which should create job and earnings growth.
“A rebound in US corporate earnings should spur a long-awaited uptick in capital spending and lift the S&P 500 to another year-end high of 3300, or 6 percent above current levels,” Bank of America said.
One noticeable shift in the City of London and on Wall Street is a move away from US equities. American stocks have been some of the best performers in recent years but, after years of gains, some analysts think US equities could be running out of steam.
“In a reversal of trend, US stock returns are expected to lag gains forecast for Europe and emerging market stocks next year,” Bank of America wrote.
Morgan Stanley also favours European stocks over US ones. In fact, the investment bank said UK stocks are “the standout equity opportunity for 2020.”
“With the risk of a no-deal Brexit now much reduced, in our economists' opinion, we think the investment case for UK equities looks very attractive, especially small caps,” the bank’s European team wrote.
BlackRock, meanwhile, is telling clients to favour Japanese and emerging market equities over US stocks.
But while analysts are still bullish on shares, there is a growing wariness about how long the stock market party can last.
“We are in ‘unchartered territory’,” RBC’s Carrier wrote. “Not only is this due to being in the longest expansion in over 70 years but also as very low, or even negative, interest rates are likely to persist.”
The current economic cycle enters its second decade in 2020 — an unprecedentedly long expansion. As a result, analysts and investors are on alert for what could derail things.
“Investor anxiety remains at a high level,” Candace Browning, head of Bank of America Global Research, said.
Politics played an outsized role in markets in 2019 and this could persist into 2020. Brexit is set to move into the next crunch stage of negotiations, the US-China trade dispute continues to rumble on, and the US are gearing up for what looks to be a divisive presidential election in November.
“We are cautiously optimistic for now, but at the same time, our asset allocation modus operandi will remain nimble in 2020,” BNP Parbias said in its outlook note to clients.