Fund and trust tips for uncertain times

The IMF predicts a rocky 2020 for the global economy, but there are still plenty of opportunities. David Prosser shares fund, trust and ETF suggestions.

Precarious. That’s how the International Monetary Fund describes the economic outlook as we head into 2020. It’s hardly a clarion bell of optimism with which to ring in the new year – but then the year just gone has not given forecasters much reason to be cheerful.

Global fund and trust tips for 2020: growth and income options
Your Fund Choices 2020: investing inspiration

Final data is not yet in, but the IMF reckons the global economy grew by just 3% during 2019, the lowest rate of growth since the financial crisis-induced recession of 2009. The economic wounds of the year just gone were self-inflicted, it says, with the trade dispute between the US and China depressing global trade to near stagnant levels.

Can things only get better? Well, the good news is the IMF is predicting 3.4% growth for the global economy over 2020 – an improvement, albeit a small one. But it’s very nervous about its forecast, pointing out that the gains are reliant on recoveries in crisis-hit economies such as Turkey, Argentina and Iran, and a strengthening of weaker countries including Mexico, Brazil and Russia.

It sees no improvement at all for the growth rates of China, the US, the eurozone or Japan in 2020 – or, in fact, until 2024.

Downside risks

Gita Gopinath, the fund’s chief economist, is downbeat. “The recent easing of monetary policy in many countries could lift demand more than projected, especially if trade tensions between the United States and China ease and a no-deal Brexit is averted,” she says. “[But] downside risks seem to dominate the outlook.”

The OECD, meanwhile, is even gloomier than the IMF. It thinks global growth was only 2.9% in 2019 and expects this to recover to just 3% in 2020 - and then only if a series of risks are avoided. It points to the danger of the US-China dispute spreading to other markets, the fallout from the Brexit impasse and the possibility of a sharp slowdown in the Chinese economy as potential threats.

Growth projections: global economy in a synchronised slowdown
Growth projections: global economy in a synchronised slowdown graph

 

Political inertia

Moreover, it’s not just these short-term issues that should worry us, argues Laurence Boone, the OECD’s chief economist. If anything, the organisation is more worried about the inability of governments to tackle issues such as climate change, digital disruption and geopolitical tension.

“It would be a policy mistake to consider these shifts as temporary factors that can be addressed with monetary or fiscal policy – they are structural,” Boone warns. Unless policymakers take a stronger lead, “uncertainty will continue to loom high, damaging growth prospects,” she says.

Where does the unsettling outlook leave investors, other than with their hands over their eyes? Well, the easiest way to make sense of the turmoil may be to think about asset allocation in terms of home and away – the view you’ll take on domestic investments and your plans for international exposure.

In the UK, there is simply no getting away from Brexit: until the question of how and when the UK will leave the European Union is finally resolved, each new twist and turn in the argument threatens to cause a fresh bout of volatility.

“Some parts of the UK market, particularly more domestic-facing stocks, now look like good value and could do well if we have a positive outcome,” argues Darius McDermott, managing director of Chelsea Financial Services. He suggests funds with value-driven strategies, such as Jupiter Income or Investec UK Securities, as a way to benefit from such a development. Man GLG Undervalued Assets is a similar fund finding favour with some advisers.

An extended failure to resolve Brexit, by contrast, would be likely to keep the value of sterling depressed, or even weaken the pound further in the event of setbacks. “Hence funds in a different currency or overseas funds would get a boost,” adds McDermott. “For example, Rathbone Global Opportunities, Janus Henderson European Focus and Matthews Asia Pacific Tiger would all do well.”

On the global stage, the US presidential election in November is the landmark event of the year. At first glance, prospects for the US in 2020 look poor. The inversion of the yield curve on US Treasuries – with longer-dated bonds unusually yielding less than their shorter-term counterparts – does not augur well; in the past, this has been a prime indicator of an imminent recession. A continuation of the trade dispute with China – let alone any ramping up of hostilities – would make it even tougher for the US to escape this fate.

Trumps direction

However, as Ben Willis, head of portfolio management at financial adviser Chase de Vere, points out, President Trump needs to deliver the feelgood factor in an election year.

“The president will want a strong economy and strong markets to underpin his efforts to win a second term,” Willis says. “It would not surprise us to see more conciliatory tones from the president towards China as we move through next year. It’s also likely he will try to persuade the US Federal Reserve to further ease monetary policy.”

How this pans out in practice will be crucial. The US is by some distance the world’s largest economy, so the prospect of it catching a cold is worrying. Moreover, the direction taken by the trade dispute now is integral to the performance of the world’s second largest economy – together, the US and China account for more than a third of global GDP so President Trump’s direction of travel takes on even more importance.

Assuming the president does look for some quick wins to boost his election prospects, investors may be able to benefit – though the US stock market, currently trading at record valuations, may not be the best place to do so. Rather, suggests McDermott: “The Japanese stock market has lagged behind the US in the past few years and is relatively cheap; funds such as T Rowe Price Japanese Equity, Comgest Growth Japan and Baillie Gifford Japanese Income Growth would be strong candidates as valuation opportunities.”

Jason Hollands, the managing director of Tilney Investment Management, agrees that investors now need to be conscious of shifting market trends.

“The protracted period of outperformance for quality growth stocks and funds looks like it might finally be eclipsed, as investors rotate into more value-focused strategies,” he argues. “Value stocks often perform well in the later phase of the cycle, especially in times when the outlook is more uncertain, because investors naturally calibrate to stocks that look attractively valued and have good dividends today, rather than placing their hope in the future.”

Eastern promise

On this basis, Hollands believes funds offering exposure to global emerging markets and Asia look attractive for 2020. “For Asia, we like First State Asia Focus and Pacific Assets Trust, and for emerging markets our picks include Fidelity Emerging Markets and Utilico Emerging Markets investment trust.”

Hollands also advises thinking about the type of structural shifts the OECD is now concerned about, rather than focusing only on market trends.“It is clear, infrastructure is going to be a big theme globally in the coming years as governments take a more active approach to fiscal stimulus,” he says. “The outlook looks promising for listed infrastructure equities and funds such as Lazard Global Listed Infrastructure Equity.

What if you take the view that storm clouds on the 2020 outlook are just too threatening? It is entirely possible, for example, that we’re in for an extended period of Brexit chaos, or President Trump is not prepared to back away from confrontation with China. Even if you think Brexit is resolvable, the UK will not escape the ill effects of a global slowdown if the US falters.

There are other worries too, ranging from the possibility of a debt crisis in Asia’s emerging markets to further setbacks in
the eurozone, where the European Central Bank is running out of options. Flashpoints in the Middle East continue to be a cause for concern, as does the unrest in Hong Kong. Political uncertainty is rife, with key elections in India as well as the US in 2020, plus the run-up to the 2021 election in Germany.

Indeed, in November, Deutsche Bank issued a list of no fewer than 20 risks to financial markets for the year ahead, from further increases in income and wealth inequality to the potential for house price crashes in Australia, Canada and Sweden.

Multi-asset tolerance

In which case, suggests Philippa Gee, managing director of Philippa Gee Wealth Management, you may need to adjust your asset allocation. “My approach would be to diversify, and to reduce risk and costs where appropriate,” she says.

“This would be through a mixture of lower-cost multi-asset funds to reflect your risk tolerance, such as those in the Vanguard LifeStrategy, 7IM AAP and L&G Multi-Index series. Then use a number of global funds to extract a more active and higher-risk approach: Fidelity Global Focus, Artemis Global Select and M&G Global Select funds are potential candidates.”

Finally, beware conventional safe havens, warns McDermott.“A third of world government bonds are negatively yielding – you’re actually agreeing to get back less than you lend,” he points out. This doesn’t mean avoiding fixed income altogether, but conventional funds are less attractive. “One fund that can take advantage is M&G Global Macro Bond, with a fully flexible mandate and a very experienced manager at the helm,” Hollands argues.

Passive plays: how to buy the world

Passive investment is one option for investors seeking a low-maintenance and low-cost approach to global markets in 2020. The good news is that a price war between leading passive management providers means tracker funds have never been cheaper.

1) In October, for example, Vanguard cut the cost of dozens of its funds to remain competitive. You can now buy its FTSE All-World UCITS ETF at a cost of just 0.22% a year; that represents excellent value for a fund tracking an index of 2,900 holdings in 47 countries, including both developed and emerging markets. Looking beyond a single global tracker fund, financial advisers make several suggestions.

2) At Chase de Vere, Ben Willis suggests HSBC American Index. “The US equity market is expensive, compared to other markets and its own history, but if equity markets are to do well in 2020, it will be the US leading the charge,” he says. “It is a very efficient market and notoriously difficult for active managers to outperform consistently, but HSBC’s fund represents a cost-efficient way of gaining exposure to the S&P 500 index.”

3) Alternatively, Tilney’s Jason Hollands suggests a different way to play the US, given valuation concerns. “I’d suggest a smart beta or factor fund with more defensive characteristics, such as Invesco FTSE RAFI US 1000 ETF,” he says.

“This provides exposure to the 1,000 largest US companies, but weights exposure based on four fundamental factors rather than market capitalisation.”

4) Closer to home, Adrian Lowcock, head of personal investing at Willis Owen, suggests L&G UK Index, which tracks the FTSE All-Share Index rather than the blue-chip FTSE 100. “At 0.10%, the fund is one of the least expensive within the sector,” he says. “And because of its 20-25% allocation to mid- and small caps, it offers broader and more diversified exposure to the UK stockmarket.”

5) Finally, Lowcock also suggests iShares Pacific Ex-Japan Index fund. “This tracks the FTSE World Asia Pacific ex Japan Index, which offers investors large- and mid-cap exposure to developed and advanced equity markets in the region,” he says. “With 540 constituents, the index is broad and has a strong structural bias towards Australia and Korea – it excludes China and India altogether.” With an OCF of 0.18% a year, this fund offers a cheap route into the region compared to active peers and passive competitors.

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