In 2020, investors should avoid politics, stick with the tried and true | Opinion
With the end of the year approaching, it is about that time when every financial prognosticator breaks out their crystal ball and peers into the future. What will 2020 bring? How will it affect my business and my investments? Is now the right time to invest? What are the winning lottery numbers? I, too, have brought out my crystal ball and have some thoughts about those questions (well, all but the last one)!
Every stock market watcher knows that 2019, so far, has proven to be a very good year for U.S. equity markets with virtually all market indexes up in the double digits. However, the expectation is that 2020 will not be quite as exuberant. With the global economy continuing to slow and political risk increasingly becoming a dominant factor, investors can expect higher volatility with more muted returns. And that should not be a surprise; a recent UBS Investor Watch survey revealed that 79% of investors think we are entering a period of higher volatility.
With big issues such as the U.S.-China trade talks, an upcoming presidential election and how Brexit will play out dominating the headlines, investors might be tempted to throw their hands in the air, pick up their toys and go home. That could prove a costly mistake. The risk to equities has actually declined recently. A U.S.-China trade deal looks more likely. Fundamentals have also become less negative due to stabilizing economic data and more support from central banks. And putting your money in cash has actually cost you. Since 2004, cash stored in U.S. dollar accounts would have lost roughly 11 percent of its real spending power. For euros, is was eight percent.
So what’s the best way to position yourself given so many variables? As an investor, you can assert a bit of control by seeking investments that are less sensitive to politics. From a stock perspective, that means dividend yielding, quality companies over those exposed to trade and government spending. Be cautious about taking a position for a particular outcome. Sectors such as technology, energy and healthcare could all be heavily affected depending on the results of the upcoming elections. Even investors are divided about which outcome would be most favorable for markets. About 45 percent expect a positive impact if the Democratic candidate wins, 40 percent if President Trump prevails.
It also means that the average investor might have to lengthen their time horizon to attain their goals. After a period of above-average returns in most major asset classes, lower returns and higher volatility look here to stay for the coming decade. One approach that could prove profitable is to focus on long-term trends such as digital transformation, genetic therapies or on companies looking to alleviate water scarcity problems. Additionally, the rapid pace of technological revolution will present a myriad of options for investment. Areas such as 5G, artificial intelligence, and cloud computing will not only impact the technology sectors, but will have far-reaching repercussions throughout the economy. The shift in consumer preferences and regulation toward sustainability also look likely to generate many investment opportunities.
Based on UN forecasts, there will be substantial demographic shifts over the next decade. For example, it foresees developed countries experiencing a decline of $25 million in their working age population, while less developed markets will see that number climb by $470 million. That shift will boost emerging markets.
Given the expectation of lower overall returns increasingly likely to push investors to take on additional risk to hit their goals, geographic as well as sector diversification become an important source of risk reduction.
Carlos Lowell is senior vice president of wealth management and financial advisor for The Lowell Group at UBS Financial Services Inc.
This story was originally published December 23, 2019 at 6:00 AM.
