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2019 proved a strong year for US assets, with US equity markets recording the strongest annual total return since 2013 and the US aggregate bond index up almost 9.0%. In addition, the past decade proved the best ever for the S&P 500 index, which returned 256% overall, well above its historical average. It was also the decade when US equities dominated other markets, with an outperformance of more than 90% versus the MSCI World index.
Despite such highs, we believe that US assets still off er compelling opportunities for global investors in 2020, though these are dependent on the evolution of three themes:
■ The resilience of private consumption amid the expected US economic slowdown. Since private consumption accounts for about 70% of US GDP, it will be crucial to monitor this component. In our view, this will remain solid and is able to bear some labour market cooling.
■ Monetary policy trends, as the Federal Reserve should not deliver an extra rate cut unless economic data disappoint, especially on the labour market front. Easy financial conditions should remain supportive of risky US assets.
■ The upcoming presidential election, which will shape economic policies over the next four years, together with market trends and sector rotation throughout this year. The electoral campaign has already de facto started, in a tense climate due to the impeachment process, while democratic candidates are preparing for the primaries. ‘Centrist’ candidates (Biden, Buttigieg and Bloomberg) will oppose ‘radical/social-Democratic’ candidates (Warren, Sanders). This is the first time that radical proposals within the Democratic Party have been pushed by candidates who have a real chance of winning the primaries. A Trump re-election is far from certain and the evolution of his electoral odds could be a source of market volatility.
Our key convictions on US assets for 2020 are as follows:
■ US fixed income: The range of Treasury yields will be wide this year, with yields possibly trending higher in the first part of 2020 as the economy reaccelerates, but lower in the second part of the year in the event of political tensions and decelerating growth. Duration should not contribute significantly to returns. We prefer a neutral/ short duration stance to start the year and expect a steepening of the yield curve. Stabilising growth and the dovish Fed stance will support credit markets. However, investors should be cautious given the deteriorating micro fundamentals. As such, we favour high-quality carry with an increasing focus on liquidity. HY is attractive on a selective basis. Securitised assets offer carry opportunities and are attractive relative to most corporate bonds.
■ US equities: The bull market will continue, though soften, and the electoral outcome will affect sector rotation and drive some volatility. An acceleration in EPS growth in the first half of 2020 should sustain the rally. Share buybacks should add about 2 pp to overall EPS growth in 2020. One area that needs attention is the high market concentration: the weight of the top five companies in the S&P 500 index has reached the highest level since 1999, at about 17%. Investors could mitigate this concentration risk by increasing diversification and focusing on bottom-up selection in cyclicals/value stocks.
■ From a cross-asset perspective, equities are likely to offer higher return potential.
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