Investment Ideas for the Next 12 Months
Positioning your portfolio for the risks and opportunities ahead.
Key Insights
- We believe five themes will drive investments over the next 12 months: recession, low oil prices and yields, stimulus, recovery, and active edge.
- For each of these themes, we have identified three key investment ideas.
- Other insights focus on strategies for uncertain times: buy on the dips, keep a clear head, and identify and use skill.
Although we have not yet reached its halfway point, we can already say with confidence that 2020 has been an extraordinary year. The coronavirus outbreak prompted the fastest-ever bear market as the MSCI All Country World Index plummeted 33.6% from February 20 until March 23. Then, after stimulus was announced, the index rallied 27.8% to the end of April despite deteriorating economic data.1 Implied volatility is still high, reflecting that we remain very much in unknown territory.
Investors now face some difficult questions. Is the recent stock market recovery sustainable, or is it merely a bear-market rally? Which investments are the likely winners and losers as the global economy recovers? And how should portfolios be positioned given there is so much uncertainty about the future?
To help answer these questions, we have identified five key themes that we believe will drive the performance of investor portfolios over the next year. Our themes are based on how we believe the global economy will perform over time and the investment implications arising from that. For each theme, we offer three investment ideas. The five themes are (1) recession, (2) low oil prices and yields during the recession and until the economy recovers, (3) stimulus, (4) the recovery that follows the stimulus, and (5) the need at all times to use an active edge.
Although money‑printing quantitative easing could be inflationary, inflation is unlikely to rise in the short term...
1. Recession
The global economy is expected to severely contract in the first half of 2020 at a magnitude not seen since the Great Depression in the 1930s, then either sharply expand in the second half of the year or recover more gradually into 2021. It is challenging to make money in recessions, but some investments—such as nominal bonds—tend to perform much better than others. Although money‑printing quantitative easing could be inflationary, inflation is unlikely to rise in the short term, not only because of the recession, but also because secular forces including low energy prices, demographics, and technology keep it low. Central banks have been struggling to lift inflation to meet their targets.
Investment Theme No. 1: Recession
1IG is investment grade.
Some sectors are likely to continue to be winners. If the recovery stalls and lockdowns and social distancing remain in place for a longer period, technology may benefit, allowing for remote connectivity, online shopping, and cloud computing. This is on top of ongoing technology‑led disruption, where investors should be on the side of the disruptors, not the disrupted. If the coronavirus makes a comeback after the summer before a vaccine is developed, health care will remain critical.
2. Low Oil Prices and Yields
Overshadowed by the coronavirus crisis, the other drama in 2020 has been the fall in the price of oil. The challenge with oil is not just the fall in demand—when was the last time you filled your car with fuel?—but also oversupply. A low price of oil typically means low inflation.
Bond yields are low and are likely to remain so for the next 12 months. Low yields make it harder for banks to make a profit. Growth stocks in the U.S. may continue to outperform value stocks because 40% of the Russell 1000 Growth Index is technology while 20% of the Russell 1000 Value Index is financials and 5% is energy (0% in the Russell 1000 Growth Index).2 Low oil prices and low yields mean there will be some losers and some winners.
Investment Theme No. 2: Low Oil Prices and Yields
Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing.
3. Stimulus
The unprecedented amount of stimulus injected into the global economy over the past few months has offered a lifeline for individuals, businesses, and economies. While policymakers may have kicked the can down the road, leaving themselves with a mountain of public debt and possibly inflation to deal with another day, the situation would have been much worse without the stimulus they provided.
Policymakers are all in—they are unlikely to be able to reverse their policies until the economy finds a strong footing. These policies have created both challenges and opportunities for investors. The three investment ideas here focus on (1) yield scarcity—when cash and government bonds yield close to nothing, (2) piggybacking central banks—buy what they buy, and (3) risk assets—in a flood, everything floats.
Investment Theme No. 3: Stimulus
1 Fallen angels are issuers that have had their debt recently downgraded from investment grade to high yield. ETFs are exchange traded funds.
2 EMD is emerging market debt.
4. Recovery
Crises typically go through three phases: meltdown, bear-market rally, and recovery. The meltdown is behind us. However, it is unclear whether the rebound of risk assets from their March lows is a dead cat bounce, meaning markets are likely to go through periods of significant ups and downs, or a sustainable recovery.
For the recovery to be sustainable, markets needed three things: (1) the peak infection rate to have passed, (2) a convincing and aggressive monetary and fiscal stimulus, and (3) receding volatility. Although all three are in place, many unknowns linger: a risk of a second wave of infections, the ability of a scarred economy to recover, and the pace of returning to a new version of normality. One scenario is for a steep and strong economic recovery in the second half of 2020; another is for a gradual recovery into 2021. One thing is sure: The crisis will end, and a recovery will begin.
The three investment ideas here are (1) diversification—true diversification, not perceived diversification, as some assets (e.g., corporate bonds, commodities) might exhibit low correlation with equities in good times but high correlation in bad times; (2) balancing offense and defense; and (3) flexibility—portfolios must be nimble, ready to adjust.
Investment Theme No. 4: Recovery
This environment is an opportunity for skilled active managers to make a difference...
5. Active Edge
The dispersion in returns among markets, sectors, and securities has widened considerably. Recessions bring a process of constructive destruction through which corporations that should fail do so. This environment is an opportunity for skilled active managers to make a difference by selecting markets and sectors that are likely to fare better and differentiate between corporations with strong balance sheets, viable businesses, and sustainable cash flows and those with weak businesses. The zombification process—through which cheap money enables corporations that should have perished to survive through cheap loans—may come to its end. In a process of survival of the fittest, the fittest active managers can select the survivors.
The three investment ideas here are about the appropriate behavior for actively managing your portfolio.
Investment Theme No. 5: Active Edge
1 MSCI (see Additional Disclosures).
2 FTSE/Russell (see Additional Disclosures).
Additional Disclosures
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.
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202005-1177622