We think the global economy will continue to slow next year. Market performance will depend largely on political choices, including the US-China trade issue and elections in the UK and the US, and on fiscal policy. But investors can reassert some control by seeking investments less sensitive to politics. For example, within equities, we recommend quality and dividends, and choosing domestic and consumer-focused companies over those exposed to trade and business spending.
The UK Parliament reached a deal to leave the EU, and sterling has gained more than 7% versus the USD since its 9 October low. While the government's fast-track exit timetable was voted down, the EU agreed to extend the deadline to 31 January. To try to push his deal through, Prime Minister Boris Johnson has announced a 12 December general election. Given our view that sterling remains undervalued, we suggest holding longer-term exposure to it.
National elections tend not to affect global investors substantially. But the US presidential vote is an exception to that rule, given the nation's economic and financial heft. Crucial economic and industrial policies are at stake in the upcoming November 2020 elections in the US, with a wide divergence between 18 Democratic nominees and incumbent President Donald Trump. We advise against positioning for a particular outcome, and instead suggest bracing for higher volatility as the vote approaches, especially in sectors such as technology, energy, and healthcare, which could be affected by election uncertainty.
Investors have greeted any sign of cooling trade tensions with relief, with the S&P 500 hitting record highs. While messages remain mixed from the US president and his officials, there have been credible signs that a deal is more likely, which reduces risks for stocks. Fundamentals have also become less negative, due to stabilizing economic data and more support from central banks. But although risks have declined, they have not disappeared. With economic growth still weak, we favor a neutral stance on stocks and prefer income-generating strategies.
Central banks are back in accommodative mode, as global growth remains weak. Markets are now pricing in negative policy rates in the Eurozone and Switzerland for the next five years. This is a challenge for investors seeking a risk-free rate of return. In this environment, we favor income-generating investments, including hard-currency emerging market (EM) bonds and select high-yielding currencies. Lower rates also increase the appeal of borrowing, whether to improve returns or fund spending. While this comes with risks that need to be managed, borrowing can help investors achieve their financial goals.
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