Despite the prevailing headwinds of lingering trade turmoil and slowing global growth, strong
underlying fundamentals and a “Goldilocks” economy that is not too hot/not too cold have combined
to support overall investor confidence. This confidence has not only sustained the record-long bull
market – now in its 11th year – but also created the best performing run in history. The S&P 500 Index
has returned nearly 475% since March 2009, surpassing the long boom of the 1990s.
Perhaps the best word to describe the performance
of equities in 2019 is resilient. In a year marked by
unrelenting volatility and a tentative rotation in market
leadership from growth to value in September, equity
markets delivered strong returns across the board.
In domestic equities, large-cap stocks bested small
caps and growth outperformed value for the year.
Sector performance overall was cyclical in nature, with
information technology and industrials continuing to
be key catalysts for market gains. Tech giants Facebook,
Amazon and Alphabet faced greater scrutiny from
consumers and lawmakers alike for much of the year,
but these mega-cap companies were supported by solid
business models and superior brand loyalty to again
deliver strong returns. We believe the underlying reason
these companies have been successful is because they
create products and services people demand. While the
noise may increase, we believe the long-term secular
opportunities created by these companies continue
to be attractive.
The information technology sector led 2019’s resurgence
in equities and we believe the backdrop for the broader
tech space sets up well going into 2020. We think a wave of
powerful trends is likely to provide a tailwind for the sector:
5G, artificial intelligence, machine learning, financial
technology, data centers, cloud storage and the “internet of
things” are all likely to play a significant role. Some of these
growth drivers have been boosting tech for years, while
others are just starting. In our view, there is significant
opportunity from these trends, especially within software
Sectors like materials and transportation dealt with
multiple headwinds during 2019, including the cost
of tariffs, higher production prices and supply chain
breakdowns. We believe many companies and industries
would likely benefit from an easing of the trade tensions
with China and think there are likely to be opportunities
within these sectors in 2020.
Certain health care industries with exposure to research
and manufacturing in China, particularly pharmaceutical
and biotechnology companies also have been impacted by
the trade war. We believe health care could face additional
challenges in 2020 if the focus on drug pricing and
access to care become platform issues in the upcoming
Consumer discretionary companies were negatively
impacted when the Trump administration announced in
September it would impose 15% tariffs on consumer goods
in two phases. In addition, investor concerns about China’s
weakening economy and growing anti-U.S. sentiment
among Chinese consumers hampered the performance of
some consumer goods, particularly luxury goods. Overall,
we think performance in the consumer discretionary sector
could be muted through early 2020 as “on again, off again”
trade negotiations drag on.
Other sectors were less impacted in 2019 by the trade
tumult, especially areas offering the perceived comfort
of near-term safety and long-term stability.
- Industrials persevered through the initial salvos of
tariffs and improved performance throughout 2019.
- Real estate and financials were buoyed by the wave of
monetary easing among global central banks. Investors
tend to see real estate as a relative “safe haven” in
today’s environment because of persistently low interest
rates, continued favorable operating conditions and
dependable cash flows.
- Financials, which had lagged in performance during
the year, ultimately delivered strong returns as concerns
about the mid-year yield curve inversion appeared to
In addition, we think the aerospace sector appears well
positioned for growth in 2020 as the pace of global travel
is expected to double over the next couple of years. We
think an abundance of oil supply and the growing adoption
of green sustainability technology among companies
and countries will likely keep prices in the energy sector
stable in 2020. However, downstream benefactors for raw
petroleum materials, such as coatings industry, view the
supply issue as a tailwind and could see positive trajectory
International equities also performed well in 2019,
with both developed and emerging markets poised to
deliver double-digit growth for the year. Europe’s economy
and business activity thrives off global trade. As signs
point to a bottoming in industrial production and a trade
war resolution, the eurozone could be a key beneficiary.
Businesses could have confidence to deploy capital and
we think there may be a recovery from a slowdown in
big-ticket purchases by Chinese consumers. This could
provide a growth tailwind to the eurozone’s core industries,
including machinery and autos. In addition, continued
strides toward a Brexit resolution could help the U.K. to
further regain its footing.
A growing consumer population with increasing wealth
across many emerging countries, improving economic
and corporate fundamentals and an explosion of new
industries offer potential investment in a wide range of
tech companies, particularly those involved in mobile
technology, memory chips, semiconductors and mobile
Because the underlying structural factors driving emerging
market growth remain solid, we believe the valuation gap
between companies in emerging markets and the U.S. is
likely to narrow in 2020. Emerging market valuations
were at a discount to the U.S. as 2019 came to a close.
But valuation alone will not support price appreciation
in emerging market equity. We also expect earnings-pershare
growth to reaccelerate. Earnings growth in emerging
markets trailed the U.S. over the past two years, but there
are market expectations for it to regain a higher rate of
growth in 2020.
Our view on fixed income markets continues to trend
toward higher quality U.S. Treasuries and investment
grade credits. We believe credit spreads could widen again
in 2020, especially in the investment grade corporate
bond market where fundamentals remain stretched with
corporate balance sheets at their most levered levels since
the financial crisis. Additionally, duration in the investment
grade marketplace continues to rise, which could lead to
higher price volatility for a given change in spreads.
We think the technical factors look favorable as net supply
in 2020 is likely to be lower than 2019 because of lower
merger and acquisition volume and tax law changes,
reducing the incentive to issue debt. However, we expect
a higher amount of total fixed income issuance principally
to fund the U.S. deficit. On the demand side, we see spreads
modestly supported by inflows into mutual funds, as well
as foreign investors searching for additional yield.
Being that we are entering the 12th year of this credit
cycle we are cautiously optimistic on the positive technical
backdrop of the market. We are constantly monitoring the
various sub-sectors that have a higher risk profile looking
potential weakness that could impact overall total returns.
As active managers we will continue to focus on the longterm
durability of the business model with the emphasis on
healthy and improving fundamentals.
2020 global outlook — Poised for a rebound?
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Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. International
investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards
and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income
security may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds.
The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment
product. The opinions are current through December 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.
This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any
investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
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