In his February market update, senior investment strategist Daniel Morris comments on the better start for many financial markets than in 2019, with strong returns for equities and fixed income. However, in addition to the risks that already existed last year and were carried over into 2020, a new risk has emerged in the shape of the coronavirus outbreak.
For now, what appears to be clear is that the outbreak will prompt only a temporary slowdown in Chinese economic growth.
Trade tensions have faded, but not gone
Among the existing risks, we believe the initial trade deal between the US and China leaves plenty of room for disappointment, and hence new tension. While China has pledged to increase its imports from the US, there are concerns that this can only happen at the expense of other trading partners, leading to friction with them.
A decision by an emboldened US president Trump to apply his trade deal tactics to other trading partners, for example in Europe, could also unnerve investors. That might undermine what is still a fragile economic recovery in Europe, a region that still faces uncertainty over the ultimate shape of Brexit as well as the outlook for inflation as it wallows below the ECB’s target.
High valuations could limit scope for gains
Overall, the investment outlook looks complex given that valuations have been boosted by rising markets amid flat company earnings growth. The US market in particular may struggle to advance further in the face of these high valuations. By contrast, valuations in Europe and emerging markets are near average.
Investors may have to be choosier if they are to gain the same returns this year as in 2019, he concludes.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.