Impeachment, Brexit, airstrikes, an epidemic, and yet the S&P 500 is at new highs. This is already a year for the history books, and we are just getting started. We began the year overweight in equities, but, in our Year Ahead outlook, described three key choices that would shape the year for risk assets. Although the coronavirus outbreak has created uncertainty, we think the direction of politics, trade, and economic policies are all still pointing in a positive direction for risky assets.
Policy risk currently lower
The majority of Americans now appear to believe they are economically better oﬀ than three years ago. And market participants seem to think that the Trump administration’s tax and regulatory regime will be extended for another four years.
Trade tensions have eased
President Trump’s State of the Union Address made it clear that he plans to run his campaign based on a better economy and fewer expensive wars abroad. Meanwhile, the US and China have cut some tariﬀs as part of the Phase 1 deal signed last month.
Economy still supported by policy
Central bank stimulus has already continued into 2020. In response to the coronavirus outbreak, China has cut rates and reserve ratio requirements and is adding ﬁscal stimulus. Global borrowing costs have also fallen further – the US 10-year yield is down over 30 basis points (bps) year-to-date.
While our overall positive framework remains intact, we think much of this supportive backdrop is already priced into developed market equity valuations. So we are reflecting our positive view through an overweight to emerging market equities. Elsewhere, we continue to see opportunity in select EM currencies, and in the British pound.
Lessons from the coronavirus
We are watching the coronavirus outbreak closely for its investment and economic impact, but the deceleration in the number of new cases means we continue to expect this to be largely contained to the ﬁrst quarter, and to China. Rather than focus on the short term, we think most investors would proﬁt more from thinking about how some key secular investment themes—such as digital transformation, localization, and genetic therapies—might accelerate in the wake of this global health emergency.
The outbreak oﬀers examples of how the conﬂuence of 5G, big data, and artiﬁcial intelligence will move societies toward “smart everything.” For instance, scientists are using Artiﬁcial Intelligence to look for warning signs on the spread of the virus in countries outside China. Private investment in the enabling technologies of AI and 5G will likely get an additional boost from government spending, as highlighted by the outbreak. As a result there is upside risk to our estimate that spending on enabling technologies will grow from USD 526bn in 2019 to USD 1.1trn by 2025.
The disruption to global supply chains from the coronavirus is also reinforcing the trend towards localization, which is already underway as a result of increased economic nationalism and the technological eﬀects of the fourth industrial revolution.
Importance of genetic therapies
The coronavirus has also demonstrated advances in genetic technologies, which are helping scientists identify how the virus spreads. In our view, genetic therapies are driving a paradigm shift in medicine. We recommend investing in genetic therapies through a diversiﬁed portfolio of ﬁrms exposed to it to manage the risks associated with individual clinical failure.