At our annual Investment Outlook this year, we polled participants for their views on issues ranging from the near-term outlook to broader trends in asset management. Held at the Raffles Hotel Singapore on 16 January 2020, our seminar brought together over 200 local and regional distributors, institutions and financial partners. A total of 129 participants took part in our online poll and they cast 684 votes in all.
From our survey, it seemed the longevity of the current economic expansion and geopolitical risks dominated concerns about markets. We also sought investors’ views on the US Federal Reserve’s interest rate direction, and expectations on various asset class and geographical performance. Investors’ responses to questions on longer-term trends such as sustainable investing and technology also threw up interesting insights.
Here we take a closer look at the various issues discussed.
The US Federal Reserve’s surprise rate cuts in 2019 arguably pulled the economy from the cliff. Where will rates go in 2020?
Geopolitical risks, the economic trajectory, the US presidential elections. How will these uncertainties affect markets?
With various issues clouding markets, how will the different asset classes perform in 2020?
Having underperformed global markets in the last two years, will Asian equities start to outperform in 2020?
How do actively managed funds stack up against passive funds?
Sustainable investing is gaining traction among investors. Will financial returns be sacrificed as a result?
Technology is disrupting investment management. How comfortable are investors in dealing with robo-advisors?
Interest rate direction
The US Federal Reserve (Fed) surprised markets in 2019 when it did an about-turn on interest rate direction, cutting rates three times for a total of 75 basis points, instead of sticking to its path of rate normalisation which it embarked on in 2018. The monetary stimulus was arguably one of the factors that pulled the economy from the brink of recession last year. We were thus keen to gauge what investors thought the Fed would do with rates in 2020.
Responses to a similar question at our 2019 Outlook seminar saw a majority expecting the US Fed to raise rates twice last year. We all missed the mark with the Fed cutting rates three times to boost the economy. This time round, with a majority (40.7%) expect no further changes. Almost half though expect that the Fed is not done, with more cuts ranging from 25 basis points (bps) to more than 50 bps.
UOBAM does not expect the Fed to cut or raise rates in 2020. With rates at currently very low levels, we expect fixed income returns to be muted with return expectations anchored at about 3-4%. At the same time, equity yield will be more highly prized and despite equity markets having had a good run in 2019 with valuations now relatively stretched, we expect earnings growth of about 7% to drive returns.
With global equity markets having chalked up 28% returns in 2019 despite recession fears, we sense some uncertainty over whether this positive momentum will continue. We asked investors what they think is the greatest risk to markets in 2020. At the same time, given that 2020 marks the 11th year of global expansion – an unprecedented period of growth, we polled investors for when they think the next recession will start.
Geopolitical risks often dominate client conversations and markets tend to vacillate about these issues but rarely do they turn out to have a lasting material impact. The global economy narrowly missed falling into recession in 2019 and by the end of the year, most leading indicators appear to be stabilising and the expansion looks set to continue. However, with no precedents on how to invest in such a long expansion cycle, our approach would be to stay nimble. Markets will be anxious along the way and we expect greater volatility.
Our Investment Outlook took place before the impact from the Coronavirus Disease 2019 (COVID-19) outbreak was felt. Markets have since taken a tumble and partially rebounded and we think this outbreak adds another risk to our global market assessment with potential impact on the economy.
Asset class returns
With several issues clouding markets and equity markets having had such a good run in 2019, we polled investors on which asset class they think will achieve the highest returns in 2020 and how they will change their portfolio positioning in the New Year.
With an expectation for muted growth, we think it unlikely for most asset classes to replicate last year’s strong performance. We recommend staying with our overweight position in fixed income, in line with our risk-based balanced income strategy to preserve and grow capital through bond yields and stock dividends. We also raised our position in equities to neutral from underweight, with a preference for US equities. At the same time, we have raised alternative assets to an overweight.
Will Asia catch up?
The Asia ex-Japan region has lagged behind in performance compared to its global peers. In the last two years, while the US stock market (S&P 500) had a total return of 32%, Asia ex-Japan only gained 1.8%. This could in part be due to the lower earnings growth and return on equity in 2019. With a lower earnings base now, we asked investors whether they think Asia will start to catch up and outperform in 2020.
Asian equities are at the upper end of valuation ranges but they are not as expensive as global equities. Earnings growth expectations in 2020 at the start of the year also look more attractive for Asia than global stocks. We start the year neutral on Asia, having upgraded it from an underweight position, but keep a close watch on conditions such as trade stabilisation that might cause us to change our view.
The outbreak of the COVID-19 subsequent to our Investment Outlook adds a new risk factor to our Asia outlook. In the past, similar events such as the severe acute respiratory syndrome (SARS) outbreak in 2003 saw market drawdowns of 5-15% over 2-4 months but once the number of new cases of the virus peaks and starts to decline, markets fully recovered their losses. Nonetheless, we are closely monitoring the development of the current outbreak and its impact on the economy and corporate earnings.
Active managers as a whole have in general underperformed passive managers in the recent past. We asked investors when they expect actively managed funds to perform better than passively managed ones.
At UOBAM, we pride ourselves on our rigorous research process, where we strive to uncover securities that are mis-priced by the market to deliver outperformance for investors. We think that such an active strategy has a place in investors’ portfolio, even as some investors may look to allocate a part of their portfolio to indices or passive funds.
At UOBAM, we have made sustainable investing a strategic priority and a key thrust of how we exercise our fiduciary duties to investors. We believe that as we invest for the future, it is imperative to address the social and environmental issues we face in the world today. We asked investors if they think financial returns from sustainable investing is lower than investing without such considerations and whether they would be willing to sacrifice financial returns for sustainability.
It seems that about the same proportion of investors (35%) either are not sure or think that sustainable investing yields equal or better financial returns. The rest – a minority – think that returns are lower. Of those who think returns are lower or are not sure, about as many are willing as those who are unwilling to sacrifice some financial returns to fulfil sustainability goals.
Our research shows that sustainable investing does not compromise financial returns. In fact, the MSCI Emerging Markets (EM) ESG Leaders index has consistently outperformed the broader MSCI EM index since the global financial crisis in September 2007. Similarly, the MSCI Asia Pacific ESG Leaders index outperformed the broader MSCI Asia Pacific index in the same time period. Both MSCI ESG indices are capitalisation-weighted indices that provide exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers. We think this goes to show that we can indeed do well financially by doing good.
Technology has disrupted the finance industry, including in investment management. We believe that by embracing technological innovation, be it in the use of artificial intelligence and machine learning in portfolio management or the deployment of robo-advisory services, we can better serve our clients' evolving needs. We asked clients how comfortable they are with using robo-advisers in making investments and whether they will be allocating a larger portion of their investments to robo-advisers in the next 12 months.
From the survey results, it seems that a majority of investors are comfortable using a robo-advisor – whether on its own or with a human advisor – to make investment decisions.
UOBAM has created our own digital advisory service for corporate investors, UOBAM Invest, where clients can use the portfolio management platform to obtain automated and customised investment advice. A first of its kind when it was rolled out in Singapore in 2018, it has also been offered to Malaysian corporates since 2019. UOBAM Invest has been very well-received by corporate investors and has garnered over S$100 million in assets under management within a year of its roll-out.
Find out more about UOBAM Invest.
This document shall not be copied, or relied upon by any person for whatever purpose. This document herein is given on a general basis without obligation and is strictly for information only.
This document is not an offer, solicitation, recommendation or advice to buy or sell any investment product, including any collective investment schemes or shares of companies mentioned within. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available and reflects prevailing conditions and our views as of the date of the document, all of which are subject to change at any time without notice. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product.
In preparing this document, UOBAM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by UOBAM. UOBAM does not warrant the accuracy, adequacy, timeliness or completeness of the information herein for any particular purpose, and expressly disclaims liability for any error, inaccuracy or omission. UOBAM and its employees shall not be held liable for any decision or action taken based on the views expressed or information contained within this publication. Any opinion, projection and other forward-looking statement regarding future events or performance of, including but not limited to, countries, markets or companies is not necessarily indicative of, and may differ from actual events or results. Nothing in this publication constitutes accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specific objectives, financial situation and particular needs of any specific person. You may wish to seek advice from a professional or an independent financial adviser about the issues discussed herein or before investing in any investment or insurance product. Should you choose not to seek such advice, you should consider carefully whether the investment or insurance product is suitable for you.