US portfolio managers Doug Rao and Nick Schommer discuss why they are balancing near-term optimism for equities in 2020 with a focus on long-term themes.

  Key Takeaways

  • A trade truce between the US and China has provided near-term optimism, which could
    boost earnings growth in 2020 as global supply chains are refilled.
  • The global economy still faces structural headwinds that will likely challenge economic
    growth over the long term. In this environment, it is imperative to identify businesses that
    can generate organic growth regardless of the macroeconomic backdrop.
  • Further equity market volatility is likely as the US election cycle unfolds.

 

Though equity markets finished 2019 strongly, the trade war between the US and China created uncertainty that stunted growth globally. Clearly, it is hard to realise growth potential with rhetoric that, if fully implemented, would cause dramatic changes in input costs. However, towards the end of 2019, the two countries came to a limited trade truce, a step that could help revive supply chains and boost earnings growth in 2020. If the adage that stocks follow earnings holds true, we could see a positive market impact from earnings improvement. Against this backdrop, we believe growth equities look relatively attractive.

Global growth challenges

 We are mindful of short-term fluctuations that affect sentiment, but we find it far more important to look at trends unfolding in 2020 that could impact on long-term growth. Although China and the US have reached the first stage of a trade deal, we believe we have entered a technology cold war. We see evidence of supply chains separating between companies that cater to China and those that supply the West.

Politically, the Western world is grappling with a surge in populism. This could be another constraint, potentially fostering instability and opposition to pro-growth policies, which could have broad impacts on companies and industries.

In the years to come, the global economy will also have to grapple with a smaller working-age population, debt that must be repaid at the expense of stimulative investment and possible stagnation from increased savings rates. We believe global growth will be increasingly tied to secular themes, posing new challenges for investors.

Fundamental optimism

These themes include the economy’s digital transformation, the transition to the cloud, the shift from physical to digital payments, and idiosyncratic innovation in the healthcare industry. We also see the evolution of companies into direct-to-consumer businesses, creating digital connections with customers and a valuable feedback loop that builds trust.

In a world where demographics, rising debt levels and political upheaval threaten growth, we believe it is especially important to focus on fundamental investing and identify individual companies that can generate their own growth. In our view, the winners will be those firms well positioned to benefit from powerful, disruptive themes, and durable franchises with the ability to grow market share.

 

These are the fund managers’ own views.