Long-Term Unconstrained Outlook 2020
Zehrid Osmani shares his thoughts on key investment themes for 2020 and beyond
4 December 2019
What’s the market not seeing?
Strong deflationary currents
We believe the market is not putting enough emphasis on underlying deflationary currents. In our view there will be a limited uptick to inflationary pressures globally in 2020. Wage inflation is a key driver of inflationary pressures in developed markets, so we will need to monitor this trend carefully.
There is a limited scope for a material pick up in wage inflation, given the strong underlying deflationary pressures coming from innovation and automation in particular, but also from the ongoing competitive pressures of emerging markets in a global world. Lacklustre global economic growth is also contributing to a sluggish inflation outlook. We believe this theme carries a risk of being persistent over many years.
We believe the market is not putting enough emphasis on underlying deflationary currents. In our view there will be a limited uptick to inflationary pressures globally in 2020.
For us, it means that we are focusing on finding undervalued companies that have strong leadership position, have a good ability to innovate, operate in industries with high barriers to entry, and that therefore have good pricing power. Disruption risk is also omnipresent, and the disruption rate is actually more rapid than it has ever been. Therefore, finding companies with low disruption risk is part of that same exercise.
What’s your focus in 2020?
As long-term investors, our focus remains consistent, and doesn’t change year after year. Broadly, we continue to focus on finding attractive long-term opportunities, with our research focusing on attractive themes within the three mega-trends framework, specifically (i) Demographic Change, (ii) Future of Technology and (iii) Resource Scarcity.
The speed at which disruptors are able to enter the market and challenge incumbents will continue to gain momentum in 2020.
The world will become ever-more disruptive
The pace of technological change seems to be increasing, helped by easier access to capital funding innovation. As a result, the speed at which disruptors are able to enter the market and challenge incumbents will continue to gain momentum in 2020.
It is therefore critical for investors to have a structured systematic approach in assessing disruption risks facing a company or an industry. Some industries are particularly challenged – we would single out transport, energy and utilities as particularly at risk, but also the financial sector which is having to respond to leaner, new entrant threats, and shifting customer expectations of how to be serviced. The technology sector is also constantly evolving, with leaders being challenged by new entrants all the time.
Cyber security takes centre stage in corporates’ focus and spend
We foresee 2020 to be a year of further focus on cyber security (notably with the US elections potentially providing an important watch point for cyber security interference of sorts). We believe that corporates will continue to up their spend on cyber security, given the increased importance it has on governance, reputational and stewardship risks. We foresee an increase in cyber attacks, which will further remind companies of the need to allocate a growing part of the IT budget to this area.
What’s the outlook for global equities?
Central banks remain accommodative and data dependent
We believe that central banks will remain accommodative across the globe, and importantly data-dependent. This should provide support for the market, and importantly for equity investors, could dictate the style leadership in the markets, with the debate around growth vs value remaining relevant.
Beyond the support that accommodative monetary policies will provide, there is a need to debate how low interest rates have become, how much lower they can go, and the repercussions of extended periods of negative rates, in terms of risky assets and savings intentions. Over and above that, there is the need to face the fact that inflationary pressures are low, and indeed underlying deflationary currents are strong.
Global Economic growth remains steady at current levels
The global economic momentum will be somewhat dependent on the ongoing US-China trade tensions, with the outlook shifting somewhat, depending on whether trade tensions ease and both nations agree to a truce, or whether tensions flare up. At this stage, based on the current developments, we believe that economic growth could remain steady in 2020 at current levels. During 2020, we could have a re-emergence of the debate around recession risk increasing, given that we are in the latter stages of what has been a long economic cycle. Our view remains as per before – we should debate the shape of a recession rather than risk of a recession.
Real GDP - forecasts
Outlook for 2020
What's the market not seeing?
What's your focus for 2020?
What's the outlook for your strategy?