Is 2020 a Year to Be Prudent?

12.16.2019 - Viraj B. Patel, CFA, FRM, CAIA


Awaiting opportunities as risks remain

With continued policy uncertainty, trade tensions and a presidential election ahead, we expect financial markets to remain volatile in 2020. These challenges suggest a cautious approach when navigating through an environment that could bring more risks than opportunities.

asset allocation chart

Equities: Risks outweigh rewards

In the US, we are underweight large-cap equities. With more evidence of a negative spillover from the downturn in manufacturing trickling into services, we feel it is appropriate to remain underweight this asset class. While US consumers and employment levels continue to appear strong, we think large-caps may face challenges if signs of global weakness impact their earnings and growth outlooks.

Given that much of the trade and manufacturing slump has heavily impacted international developed markets, we remain underweight stocks in these countries. With Brexit risks pushed into 2020 and limited scope for monetary and fiscal policy, the headwinds facing overseas markets could continue.

In emerging markets, we maintain a neutral view. While many of the factors that have weighed on international large-cap equities have also weighed on emerging market equities, we believe a supportive liquidity backdrop could help offset some of the challenges emerging market stocks face.

Fixed Income: A flight to quality

Interest rates have plummeted around the globe, driven by fears of a global recession and heightened risks surrounding trade policy. Central banks have made a renewed push toward more accommodative policies but concerns about the economic and policy backdrop have led to heavy demand for bonds, causing a record amount of sovereign debt to drop into negative-yield territory. We believe the long end of the curve can still rise in the medium to long term, especially in the US, but are more cautious about short-term rates.

Alternatives: A hedge against the unknown

In this so-called “Twitter economy” with its near-daily market gyrations, alternatives can be an effective tool to reduce volatility within a portfolio. Therefore, we continue to recommend a strategic allocation to this asset class.

Cash: Keeping some powder dry

Given the high level of market sensitivity to headlines, we believe cash provides the flexibility needed to capture attractive investment opportunities as they arise.

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2019, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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