December 12 2019


Needless to say that predictions are famously known for being in average wrong. By now, we would know if anybody had the prescience of seeing things to come. Nevertheless, forecasting helps our cartesian minds setting the framework for the future known unknowns, and is a fun game for some. So let’s do it.

As everybody and her sister in the financial world is giving its 2020 outlook, it is pretty clear that the mainstream thinks that the worst could be avoided. Assuming accommodative Fed and a benign economic backdrop, the consumer would probably help us sail into 2020 without too much hassle. Add to this the “US election Put” and a talking-up of fiscal measures in Europe, you might well end up pushing back a recession into 2021, despite the high surrounding political uncertainty.

Of course, investors are worried about the consequences of a huge binge on debt from household, to corporate, to Governments. In a logical world, the more the supply, the lower the price and the higher the yield. But, in the new normal world we live in since 2007, central banks support has artificially set yields down instead. Negative yields are rightly the bigger unknown risk of the years to come.

With a low-return-decade-to-come in mind, investors are on the lookout for higher-yielding assets in 2020, going into private investments, Emerging Markets equities, value stocks, and high yield bonds both in USD and Local Currencies. These asset classes are by now part and parcel of all respectable forecasting exercise for the year to come, whether it is at Blackrock, or at the few investment banks we are close to.

Part of us thinks that we cannot not follow the recommendations of these professionals commanding vast dollar investment amounts. After all, momentum (another name for herd investing) has been the only game in town over the past 10 years, so let’s invest like we linkedin or retweet, or insta-like, shall we?

The other part of us thinks it is scary that the market believes that bull cycles are forever, and is ready to compress yields in the darker and more risky places on the planet. The world is still going to be very digital (we mean 0 or 1) from now, either a goldilocks scenario with growth-supportive policy and little inflation, or a stagflation with slowing growth and rising inflation. In trading terms, the tail risk is huge.

When we look at the fundamental rise of boomer-retirees, and sagging corporate profits, very little points us to a raging growth going forward. Also, when speaking to institutionals and smart money investors (if that at all exists), we notice that actual investment strategies are still highly cautious.

Our base scenario is still that a pullback from rich valuations is very likely, even though we abide by the view that higher-yielding quality assets are a must. But who are we to predict things?

360 Advisory – Markets