In our view, the market has largely ignored disappointing earnings growth over the past year. We believe a continued focus on high-quality companies in the value space can help investors weather future volatility, particularly as the economic outlook remains uncertain.
- We feel weak balance sheets and disappointing corporate earnings growth have been largely ignored by equity markets over the past year.
- The liquidity push by central banks has not yet eased the headwind for earnings growth but has expanded the multiples paid for these earnings, which could pose a significant risk for the market going forward.
- In 2020, we think a continued focus on high-quality companies may help investors weather future volatility, particularly given the maturity of the current business cycle and the uncertain economic outlook.
Where do you see the most important risks and opportunities within your asset class in 2020?
Given the strong market in 2019 and the duration of the bull market since 2009, it’s important for investors to be in a position to both participate if the market continues to move higher and protect gains should the market encounter turbulence. In our view, it’s difficult to comprehend many of the valuations in the market, but there are opportunities, particularly in the smaller market caps, which have seen relative valuations improve. It appears the market has overlooked weak balance sheets in this decade-long rally, but we feel it’s important to avoid over levered companies when the investing environment turns cautious.
Are there key market themes that are particularly important going forward?
As we look forward, some of the themes that have permeated the equity markets in 2019 will likely continue to have an impact in 2020, including trade, central bank activity and concerns about global economic growth. While it’s difficult to predict the ultimate outcome of any of these issues, investors need to be aware of the risks (both upward and downward) that each may have on the market. In particular, we are struck by the appetite of central banks to shift into easing mode when global growth is slowing but still positive. The liquidity push by central banks has not yet eased the headwind for earnings growth but has expanded the multiples paid for these earnings. This has potential to be a significant risk for the market going forward.
How have your experiences in 2019 shifted your outlook for 2020?
We have discussed for some time the inevitable shift from growth to value, and while we have not experienced a full-scale switch, we have seen sporadic movement during 2019. Given the valuation extremes between growth and value, it seems logical that the shifts between the two will continue to occur in 2020. We believe a continued focus on high-quality companies in the value space, which is littered with leveraged balance sheets, can help investors weather future volatility, particularly given the maturity of the current business cycle and the uncertain economic outlook.
Is there a key indicator to watch for 2020?
From interest rates and economic data to rumors of trade negotiation success/disappointment, there has been a host of forces driving market moves in 2019. In our view, the one thing that has been mostly ignored by the market this past year has been disappointing earnings growth. Since most market moves in 2019 were due to expanding valuation multiples given anemic earnings growth, we think investors should pay close attention to corporate earnings in 2020.
ABANDON YOUR DOUBTS,
NOT YOUR GOALS
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