“Peak pessimism is behind us, and 2020 could surprise positively,” said Sean Taylor, chief investment officer for Asia-Pacific at DWS, speaking at a media briefing in Hong Kong this week.
Supportive factors include a prolongation of the global economic cycle and avoidance of a recession as indicated by a pick-up in purchasing managers indices in the last two months, a freeze on current US-China tariffs and no further escalation of the trade dispute, and a widespread recovery in emerging markets’ growth led by Asia.
“In this environment, investors have no alternative but to invest in equities, [which will be further bolstered by] modest corporate earnings acceleration, ” said Taylor.
Six months ago, Taylor warned of the downside perils to his “cautiously optimistic” strategic outlook, including slower global growth, more volatility in debt markets, the timing of China stabilisation, regional geopolitics – such as Iran – and especially a “protracted US-China tariff war where there is no deal in sight”.
Taylor expects global economic growth in 2020 to match the 3.1% expansion of this year, but it will be powered by emerging markets rather than the US. He forecasts 4.4% growth for emerging markets next year compared with 4.2% in 2019, with emerging market Asia growing at 5.7%, stimulated by domestic interest rate cuts and a resolution of the US-China trade dispute. In contrast, US GDP growth is likely to fall to 1.6% from 2.2%.
“The big positives are emerging markets, which should be the engine of global growth,” said Taylor.
DWS funds are overweight Brazil, China, India, Russia and Thailand relative to the MSCI Emerging Market index; neutral Indonesia and South Korea; and underweight central Europe, Malaysia, Mexico, Philippines, South Africa, Taiwan and Turkey.
Among regional indices, the MSCI Asia ex-Japan index should be the best performer next year, generating a double-digit return, after underperforming US and European markets in 2019 as the US-China trade dispute dampened sentiment, according to Taylor.
He prefers Hong Kong-listed China stocks (H-shares), which are trading at a 30% discount to mainland-listed A-shares as a result of bearish international investor sentiment fuelled by trade dispute concerns and anxiety about the continuing protests in Hong Kong.
This marks a tactical shift in his view from last quarter, and contrasts with the strategy of several asset managers, such as Alliance Global Investors and Value Partners, which continue to favour A-shares.
In India, Taylor is encouraged by recent corporate tax cuts and prime minister Narendra Modi’s privatisation programme, despite the country’s sluggish economic growth and its failure to rein in its fiscal deficit, which prompted Moody’s Investors Service to downgrade its outlook to negative from stable last month.
Thailand is a “defensive play”, while Taylor has raised South Korea to neutral from underweight on expectations that a resolution of the US-China trade dispute should boost the country’s technology sector.
Credit over rates
Although equities offer the best prospects next year, there are also opportunities in fixed income, according to Taylor.
He doesn’t expect any further US interest rate cuts so “a floor on treasury yields might have been reached”, while negative yields and little prospect of rate cuts by the European Central Bank (ECB) provide negligible upside for core European government bond markets, despite the extension of the ECB’s quantitative easing programme.
“In this non-recessionary, low yield sovereign bond environment we are more constructive on credit and emerging market dollar-denominated debt,” said Taylor.
Asian bonds which are yielding between 4.5% and 5% are especially attractive, because the issuers are less concentrated in the financial sector than European high yield and less vulnerable to shocks than US high yield bonds, he argued.
“They are a safer alternative that compensates for the higher yields of riskier, lower rated corporate credits available in the US and European markets,” said Taylor.
“Increasingly there is a strong regional bid for Asian credit, which is helping create a broader and deeper market,” he added.
Taylor’s “constructive outlook” for Asia equities and credit is predicated most on a resolution — or at least a non-escalation of the US-China trade conflict. Hence, the biggest threat to his forecasts and the strategy of DWS funds would be if aggressive rhetoric were to translate into a failure to find a resolution.
“We need a phase one agreement this month,” said Taylor.
DWS 2020 asset-class forecasts
| Equities | Expected total return | Government bonds (10-year) | Expected total return | Credit Spreads | Expected total return |
| S&P 500 | 6.81% | US | 1.96% | US IG | 2.28% |
| Eurostoxx 50 | 6.96% | Germany | 0.39% | US HY | 3.17% |
| MSCI Japan | 7.71% | Japan | 0.42% | Asia Credit | 4.90% |
| MSCI EM | 9.89% | UK | -0.49% | EM credit | 5.69% |
| MSCI Asia ex-Japan | 10.64% | Spain | 0.62% | EM Sovereign | 5.50% |
