Our 2020 vision: sustainable strategies may offer a path through volatile markets

In 2020, we expect markets to pivot between embracing and avoiding risk as they process muted economic growth, low rates and heightened political uncertainty. Consider managing risk actively rather than accepting volatile index returns, and think beyond the benchmark by investing sustainably and adopting thematic approaches.

Key takeaways

  • Expect wide “risk-on/risk-off” movements caused by US elections, trade developments and ample liquidity from central banks; risk management will be paramount
  • Threats to the oil supply, food-security fears and growing US-China competition could create additional risks for portfolios
  • Focus on the long-term sustainability of companies by incorporating ESG factors into investment decisions
  • Choose carefully among over-owned US equities; consider undervalued European stocks and emerging-market debt; look to alternative investments for less correlated returns; keep up the hunt for income against a backdrop of low yields
  • Thematic investments offer access to stories with long-term global growth potential, such as artificial intelligence – they may be able to create value, and they resonate with investors’ values and interests

We think 2020 will be characterised by muted global growth, a slower US economy and continued uncertainty about how monetary policy and politics will move markets. In this environment, investors should aim to keep their portfolios on track by having conviction and actively managing risk – not avoiding it.

Major political developments, including US President Donald Trump’s bid for a second term in office, are on the horizon. This will likely contribute to wide “risk-on/risk-off” movements as sentiment swings between riskier and “safer” asset classes. We expect low beta returns for the overall market, which makes pursuing alpha – in excess of market returns – all the more important.

Risk-on/risk-off pattern is more visible again

Chart 1: risk-on/risk-off pattern is more visible again

Source: Allianz Global Investors Economics & Strategy; Bloomberg; Refinitiv; HSBC. Data as at 25 Oct 2019. Risk-on/risk-off index = average correlation between risky assets + average correlation between safe assets - average correlation between risky and safe assets (rolling 180-day correlations).

Central banks will remain a major market driver in 2020, even as their efforts to spark economic growth become less effective and today’s ultra-low interest rates provide less room for manoeuvre. Rates have been negative in Europe and Japan for some time, and the US Federal Reserve (Fed) has resumed cutting rates that were already low. This approach has supported stocks and other financial assets, but it has also artificially inflated their prices – and contributed to wealth inequality – while not restoring enough economic growth. Facing dwindling options, central banks will likely continue offering additional stimulus with limited effect. Governments may need to shoulder some of the burden by increasing spending, reducing taxes or both.

Unless they want to chase index performance in this up-and-down environment, investors will need to address risk in a deeper, more holistic way – for example, by focusing on climate change and other risks that a company may face as it produces its goods and services. Incorporating environmental, social and governance (ESG) factors into investment decisions can help manage risks and improve return potential. So can thematic strategies that help investors align their portfolios with their convictions about how powerful long-term shifts – triggered by innovation or regulation – could create investment opportunities.

Next: FIVE FOCUS AREAS FOR 2020
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There is no guarantee that actively managed investments will outperform the broader market. Investments in alternative assets presents the opportunity for significant losses, including losses that exceed the initial amount invested. Some investments in alternative assets have experienced periods of extreme volatility and in general, are not suitable for all investors.

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