Positioning in 2020

For the first January in years, the Western Cape is not facing another day zero to prepare for, and this whole drought situation also taught me one of my greatest life lessons. Like most Capetonians, I followed the standard water storage route by installing both a rain water tank and a grey water tank.

Trying my best to do my bit for the environment, I then store the water used for my two-minute shower along with any water used by the washing machine on laundry day for the purpose of irrigating our garden. To supplement this system, I usually also consult local weather forecasts to determine if any rainfall will come our way in the near future. If we’re lucky enough in that respect, I will use less grey water for irrigation purposes and wait for the rain to take care of the rest. Of course these weather forecasts were not always spot-on, but it did help me to manage the risk of not using all my grey water to irrigate the garden only for it to rain after a day or two.

Every year, I apply the same planning process to investments, but instead of weather forecasts, I consult some of the world’s largest investment company reports to determine their expectations for the coming year.

Much like weather forecasts, they are not always right, but the fact remains that these companies with their massive budgets and strong research teams help me to manage my clients’ risk. I worked through 20 investment reports and although each one has its own view on world markets, most of them did share the same views on a number of subjects:

Tread carefully when it comes to the USA

Most investment companies feel that American shares are lagging behind in the growth cycle and that caution needs to be exercised when selecting these shares for your personal share portfolio. Not one of the reports I consulted really expects the US stock market to crash in the near future, but they do warn investors to be cautious. Three main suggestions showed up in this area:

  1. Rebalance any overweight positions. Currently, the weight of the US portion within the MSCI All Country World Index amounts to 55.6%. If your total investment exposure to the USA exceeds this, then you need to consider the risk of an overweight position given your personal circumstances, and adjust your positions accordingly if needed.
  1. Manage your own expectations. What they mean is that investors should be extremely careful in using 2019’s return as a benchmark for the future. The fact that the S&P 500 grew by 31.5% in 2019 in US$-terms could lure many investors like a moth to a flame. I’m not saying that the S&P 500 is going up in flames any time soon, but I think investors should be prepared for lower-than-expected growth. Even when we have a look at consensus forecasts (Thomson Reuters) for each of the 500 companies listed on the S&P 500 Index, you will see that analysts only expect around 5.4% growth for 2020, based on index levels of 3288 as at 13 January 2020. If your personal expectations exceed these 2020 forecasts, you run the risk of being gravely disappointed if your expectations are not met.
  1. Make sure that the shares you do choose in 2020, are more defensive in nature. Quite a few reports have warned against highly valued tech companies.

Be cautiously optimistic about Europe and Japan

Most investment companies believe that a gradual recovery for both Europe and Japan is imminent. I will discuss this in more detail at a later stage, but with investors expected to return to value shares, it would appear as though Europe and Japan will take preference with more undervalued shares identified in this area.

Positive about emerging markets

On this subject, it was as though all these different investment companies spoke with one voice. If the USA and China can come to an agreement regarding the ongoing trade war, it will not only be positive for China, but also for emerging markets generally. Most people feel that a resolution will be found, which will definitely make emerging markets one of the preferred investments for 2020.

Value may trump growth in 2020

As I mentioned earlier, there is a growing concern surrounding high or overvalued companies and the term “growth shares” keeps coming up. When we take a look at the graph below depicting the growth of MSCI World Value Shares relative to MSCI World Growth Shares, it becomes clear why so many investment companies feel that it’s lagging behind in the growth cycle and that the focus should be shifted towards the more unpopular value shares.

Graph 1: MSCI World Value Shares relative to MSCI World Growth Shares (source: @SchalkLouw, Thomson Reuters & PSG Wealth Old Oak)

To conclude, it does appear that the general trend of these various reports points towards investors having to act cautiously when it comes to share portfolios, but that there definitely is still value to be found by for those who are looking for it.

The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.


Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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