Investors fear 2020


    This week, I spoke at a conference for institutional investors, and it once again surprised me how nervous many are concerning the risks for the global economy next year, and a sell-off in the stock markets. I also find it noteworthy how large global asset managers have advised clients to reduce risk in their investment portfolios over the past months.

    In my view, there is no doubt that investors globally have followed these advices and reduced risk in their investment portfolios compared with the period prior to the equity sell-off in May.

    But with the expression “reduced risk”, then it means that there has been a portfolio shift from equities to bonds. Though in my view, the bond market has long since been trading at too expensive prices, and therefore, I argue that the safe heaven feeling from buying bonds is an imagination more than a reality.

    The discussion concerning the bubble in the global bond market I will leave aside right now, but I argue that it underlines the current growing irrational feeling concerning “risk”, and which risk to focus at.

    The most underweighted risk allocation for several years now has been investments allocated to Great Britain, though some asset managers have actually already now discounted a “Brexit-solution” into their portfolios.

    For this reason, these asset managers have upgraded their investments to a neutral position, but my impression remains that the majority of investors are still unweighted in their allocation towards the United Kingdom.

    Just two months ahead of the big jump into a new decade, and even “The Roaring Twenties”, investors are more nervous about the outlook than since long.

    Apart from still being less invested in Great Britain, it also applies to Emerging Markets and equities as a whole. Many comments and shifts in asset allocations, I read in a way that equities are currently regarded as riskier than for just half a year ago.

    But some raise the observation that the stock markets are actually trading upwards and are quite positive right now, despite many investors fearing a new downturn, so other investors must be buying.

    I agree that there is a disparity between the fear for risk, in particularly concerning the stock markets, and the current market development.

    It happens that investors blindly buy a market higher and higher, but I argue that it’s not the cause in the stock market right now.

    There have been two fairly large sell-offs this year in May and August, and further are the Chinese and the British markets underweighted in many portfolios.

    The way I asses this situation is that during 2019, some positions have been washed out, and the total global stock market that is not bought higher to an extreme level at all, i.e., the current uptrend, is not just a blind rally.

    I find the disparity very interesting as it’s outspoken in my view, even to an unusual degree. Particularly wherein Asian investors reduced risk after the equity sell-off back in May this year, and I have a feeling that a big number of investors haven’t brought the risk back into their portfolios yet again.

    In addition, there is currently some relief among European investors, and I continue to argue that more European countries will be forced to increase fiscal spending coming into the new year.

    All-in-all, these forces will be supportive for the equity market on the European continent and there is a chance that the internal Brexit dispute will be solved within a couple of months, after the British general election.

    This would almost certainly lead to a significant inflow into British securities from across the world.

    The trade war between USA and China seems to find a first-round solution, which has already been reflected partially in the rising stock markets around the world, but after the new trade agreement, even more positive vibrations will be spread.

    The expectations on the GDP-growth in the US next year is more likely to be upgraded, instead of the opposite, and consumers around the world will stay firm and consume in a robust way.

    I am not arguing that 2020 looks rosy in terms of economic growth, but in my view, it’s not that bad at all, and will be better than what investors fear.

    I argue that investors globally haven’t taken these positive components into full account when judging risks and the financial markets upon entering the new decade and the roaring twenties – based on the current outlook I am somewhat more optimistic concerning the upside potential for next year.