Now that 2019 is almost over, investors are starting to look around for where the best returns might come in the New Year.
And perhaps, surprisingly, despite all of the economic stagnation and gloom that has been hard to ignore in the past year, the dominant theme from most broking and investment houses is that 2020 will be a really good year to add some more risk in your investment portfolio.
Now the cynics might suggest that they always say that – and they make a good point given that the big investment firms almost always have a “buy’’ bias because that is where they earn their money – but it is still worthwhile going through some of the arguments for increasing risk allocations.
Lower rates could mean higher share markets
The first and most obvious is that with central banks around the world cutting interest rates to stoke their economies, there is a good chance that they might get what they want in the form of an increase in overall economic activity.
Like many of the big Wall Street players, JP Morgan Chase & Co is recommending a risk-on investment allocation for 2020 due to its prediction that the global economy will begin to gather momentum.
Time to sell bonds and buy shares
That means the company tips an underweight exposure to both government and corporate bonds – which have shot the lights out with capital gains for many years now as interest rates keep falling – and adopting an overweight exposure to local US and international shares.
JP Morgan is also underweight on gold as low yielding options as the gap between really low yielding but defensive options such as cash, bonds and negative yielding gold finally make way for the much higher returns available with shares.
The organisation admits there are risks with its approach with the main one being a rise in volatility. The bank’s answer is to use hedges across asset classes and particularly on currencies as a precaution.
US election could be a big risk
The US presidential election in 2020 is perhaps the biggest of those risk factors, with the largest risk coming if the Democrats pick a more progressive candidate to do battle with Donald Trump.
One of the other big trends that JP Morgan and many other big investment companies are tipping for 2020 is a move to investing in developing nations and away from developed countries.
Again, the big attraction is higher relative returns.
Emerging markets could return to favour with high returns
A Bloomberg survey of 57 global investors overwhelmingly found that emerging economies had the best prospects, particularly in Asia.
The consensus was that emerging markets would outperform developed markets in all asset classes including currencies, stocks and bonds, as the US-China trade dispute continued to drive a search for higher yields and China’s growth outlook continued to moderate.
That would mark a strong reversal from the situation in 2018 when money flooded out of developing countries as the US Federal Reserve cut interest rates to support growth.
Now most players see 2020 as a time when central banks in the developed markets will sit on their hands for the year, allowing for the attraction of higher returns in the developing countries to exert a magnetic pull on investment cash looking for a home.
Asia the top pick
Asia was the top pick for currencies and stocks, with Latin America being the favoured destination for bonds.
Europe, the Middle East and Africa were the least favoured for bonds and equities, but their currencies held more appeal to survey participants.
For Australians, it is always a good idea to watch the intentions of the really big investment houses in the developed countries which decide so much of the capital flow in the world.
Australians can jump on the bandwagon
Some of the ways to get some emerging market exposure in Australia include the iShares MSCI Emerging Markets ETF (ASX:IEM) and also SPDR Emerging Markets ETF (ASX: WEMG), Vanguard FTSE Emerging Markets ETF (ASX: VGE), Fidelity’s active Global Emerging Markets ETF (ASX: FEMX) and BetaShares Legg Mason Emerging Markets managed fund (ASX: EMMG).
A couple of things that Australians need to be careful of in emerging market funds is that sometimes the effect of price changes is muted when they are converted to Australian dollars and also management fees on emerging market funds can be higher than other exchange traded funds.
Some of the emerging market funds are also quite heavy on exposure to China.