GLOBAL
James Thomson, manager of the Rathbone Global Opportunities fund (GB00B7FQLN12)
Everyone keeps saying “the US market won’t outperform this year” and yet it does, year after year. I think the US market will do it again in 2020. That’s where the growth is, and US companies are growing profits four times faster than the rest of the developed world. They have world-beating, resilient, rock-star companies that the rest of the world just doesn’t have.
I’ve taken my US weighting to about two-thirds of the fund, but of course there are still problems. There are some very ugly politics, but an election coming up is typically positive for markets. The trade war would appear to be the biggest headline risk that we face – if all three stages of the tariffs were implemented, it would cost each US household about $1,000 each. But I believe interests are aligned on both sides. President Trump wants to hold up a victory going into the election and the Chinese will want a victory too approaching the centenary of the Communist Party.
A US recession is unlikely in 2020 – it’s been the most overdone story of 2019, and it’s been taken off the table by an accommodative Fed and Chinese stimulus, both of which help the entire world. There’s a sense of ‘end-of-cycle-itis’ – the belief we have been close to recession after 10 years of growth, but I think there are enough tailwinds going into the New Year
Finally, for the first time in three years, I’m starting to warm to the UK, although I haven’t reached boiling point yet. A hard Brexit being off the table is good news for the UK economy, but we’re entering a tricky transition period and have a trade deal to negotiate. And let’s not forget who the UK is negotiating with – no matter what you think of the EU, they’re still the world’s best trade negotiators. So, some tricky times ahead. But you can find some exciting ideas in the UK – great companies with adaptive, innovative management – although you need to think about where and how you want to invest.
Arno Lawrenz, global head of multi-asset strategy at Ashburton Investments
A year ago, markets were awash with pessimism, and after the US Federal Reserve hiked rates for the ninth time – with the prospect of more to come – December saw the worst equity market performance for more than 50 years. Fast forward to today, the S&P 500 is up by more than 21 per cent as at end-October, and the Fed has already cut rates three times. This points to how quickly the outlook, and sentiment, can change.
Global monetary policy has now shifted firmly into easing territory and fears of a global recession are dissipating. We can compare this situation to 2015-16, when co-ordinated central bank policy pulled markets out of the doldrums. In this context, we may have already had a foretaste of what is to come in 2020.
However, as in 2016, stimulus can only last for so long before more is required. As a result, we believe the effectiveness of monetary policy will face serious questions in 2020. Some may even argue ultra-easy monetary policy sows the seeds of financial system instability. In this respect, fiscal stimulus may have to be employed in order to fend off fears of another global downturn and avoid the prospect of rising market imbalances.
With this in mind, while we are cautiously optimistic in the near term about prospects for equity markets, these prospects are likely to fade again as the extent of stimulus required becomes apparent. Unless authorities are able to soothe recession fears, the possibility exists for a more prolonged downturn to arise sooner than expected.
As an overlay to this, equity market valuations are not supportive of extensive gains. In the US, the 10-year cyclically adjusted price earnings (CAPE) ratio for the S&P 500 remains in lofty territory, at more than 30 times. This is far higher than the long-term average of 16.7. So, absent a significantly strong surge in corporate profitability, we cannot argue for an overly positive outlook on returns. We do not believe monetary policy stimulus alone will be sufficient to create such an environment. Accordingly, we see US returns in single-digit territory and only remain cautiously optimistic in the short term.
Bond yields may well benefit from flows to safe havens, but expanding fiscal deficits may cause investors to increase the required risk premium. In a world of still low bond yields, emerging markets will also benefit from a continued search for yield, but we do not see the possibility of sustained yield gains should risks keep rising.
UK
Mark Martin, co-manager of the Liontrust UK Mid Cap fund (GB00B3D7FD61)
Despite Boris Johnson’s pleas to “get Brexit done”, we expect ongoing political wrangling in 2020 will continue to impact the outlook for the UK domestic economy. Many of the complex negotiations required to get Brexit actually done have yet to begin and will last for several years. Nonetheless, a reduction in political uncertainty may provide some relief to UK investors and even catalyse further mergers and acquisitions of undervalued UK companies by overseas companies and private equity. We expect M&A to happen for internationally focused companies in particular as they are less dependent on the fortunes of the domestic economy for their long-term prosperity.
Given how low interest rates are throughout the developed world, governments and policy makers are likely to be increasingly focused on the potential for increased government spending to stimulate demand. This may also create investment opportunities for domestic companies to benefit, but we would be wary of pushing too hard on this theme given the difficulty of stimulating healthy demand in the short term, and the structural balance sheet pressure the UK faces.
As the global economy continues to recover, we expect underperforming UK companies will be those with high debt levels that have failed to reinvest adequately in their businesses – perhaps because they have focused on short-term payments of dividends or debt. We expect outperforming companies to be those that have reinvested sensibly in recent years with a relentless focus on enhancing customer satisfaction.
At a sector level, we continue to underweight the real estate and utility sectors and prefer sectors that rely less on debt as part of their business models – such as industrials, chemicals and technology. We also believe that companies with high wage costs and low margins embedded in their business models may struggle should inflationary pressures return from current low levels.
Alex Wright, manager of Fidelity Special Situations (GB0003875100)
Among global stock markets, the UK stands out as cheap and unloved, for reasons that have been discussed at length by many commentators over the past three years. However, looking forward, the tail risk of a ‘no deal’ Brexit scenario now appears to have reduced meaningfully since Boris Johnson secured a deal in Brussels and the subsequent general election.
While I am not banking on a ‘parting of the clouds’ moment in which the way forward suddenly becomes clear, I do think it seems likely that the worst-case ‘no deal’ outcome now seems significantly less likely.
It is true that fundamentals are not great in the UK, but neither are they in many other parts of the world. Importantly, what the UK has which other markets do not is a low starting valuation and potential for a positive catalyst. However, I do not want to claim that I have some insight into when this valuation gap could close. The value investment style has experienced a difficult 10 years since the financial crisis. Falling interest rates have favoured stocks with more certainty and bond-like characteristics, whereas value stocks by their nature often have some uncertainty around their future. Given that the performance of the value style is tightly linked to unpredictable macroeconomic events, it is very difficult to make predictions about when value might stage a recovery, although it would seem that this would require growth and interest rate expectations to rise from current levels.
While undoubtedly an area of increasing interest, it remains prudent to tread cautiously among UK domestic stocks as the structural issues facing some of these businesses mean they could be ‘value traps’. In order to navigate this risky environment, I look for businesses with strong balance sheets, a self-help story and a relevant offering that should withstand structural challenge from disruptive market entrants.
It is hard to ignore the effects of politics and economics on this part of the market, with UK retailers particularly exposed to sterling weakness as they buy their goods overseas and sell it in the UK. However, taking all this into account, I do see selective opportunities in UK domestics and own positions in financials and consumer businesses.
Andy Brough, head of pan-European small and mid cap at Schroders
The pick-up in M&A this year is telling. A number of small and mid-cap (SMID) companies on the receiving end of bids have been domestically focused. These include UK pub operators Greene King and EI Group plus smaller peer Fuller, Smith & Turner (FSTA), which sold its brewery (of London Pride acclaim) to Asahi of Japan.
Other examples include Dairy Crest (snapped up by a Canadian peer), Telford Homes (bought by American real estate firm CBRE) and Hull broadband provider KCOM, acquired by Australian investment business Macquarie.
This suggests that the value that can be found in spurned UK domestic quoted stocks relative to an equity market that has reached historic highs has not gone unnoticed by all market participants.
October’s ‘Brexit bounce’ gave a taste of what might happen should sentiment improve – the share price recoveries of investment trusts invested in UK SMID companies were particularly pronounced. Such trusts tend to have a greater exposure to UK domestically focused shares than their large-cap equivalents do.
During periods of market stress, sentiment towards UK domestically focused shares is prone to becoming excessively negative. This happened last winter. Backers of shares such as petcare specialist Pets At Home (PETS), homewares retailer Dunelm (DNLM) and athleisure leader JD Sports (JD.) (since promoted to the FTSE 100) have done well in 2019.
We take comfort that the UK economy is not in dire shape. Recently released data from the Office for National Statistics show that growth in household spend (three-quarters of all spending in the economy) has continued in 2019. It would also appear to us that this growth is reasonably sustainable, underpinned by a strong jobs market, real wage growth and lower taxes.
US
Cormac Weldon, head of US equities at Artemis
For some time we have been saying that economic growth has peaked, but the cycle has been extended. This is largely due to the resilience of the US consumer. Business confidence has faltered, as attested by the recent drop in chief executive confidence. And it is likely to continue to be muted in the run-up to the 2020 presidential election. So we are seeing lower growth in capital expenditure and expect it to slow down further next year.
But the US economy is 70 per cent dependent on the consumer. Employment prospects remain very good, wages are growing and people generally have low levels of debt. As a result, consumer confidence and demand are high and this is helping to extend the economic cycle. The net effect is that economic growth is slowing, but we still expect it to grow at 1 to 2 per cent over the next year.
On trade negotiations with China, some commentators are optimistic that Trump will make concessions in order to boost growth, given that he wishes to be re-elected next year. We are not so sure. It is clear from President Trump’s record that he has always been anti trade and pro tariffs. We think he is unlikely to abandon that position. In the run-up to the election, he will want to show that he is standing firm on tariffs.
Beyond the Trump administration, there is a wider consensus that China is a problem that needs to be dealt with, particularly in regards to the theft of intellectual property. It will be difficult for China to provide the reassurances the US wants on this area. We don’t think this will be resolved any time soon.
EUROPE
Giles Rothbarth, co-manager of the BlackRock European Dynamic fund (GB00B5W2QB11)
Glimmers of hope have recently started to emerge for European equities. After over 20 per cent of assets left the asset class since March 2018, flows, particularly in ETFs, have tentatively started to return to the region. Some of the factors driving a more positive sentiment for the coming year are: looser monetary policy; a bottoming of certain end markets; and hope for fiscal stimulus.
But while investment recommendation upgrades for the region are encouraging we, as active investors, are often cautious about buying into the short-term newsflow. Rather, our process focuses on uncovering companies with earnings potential that is not embedded within the current share price.
Often, these companies have dominant positions within their markets that are protected by products, brands and contract structures unrivalled by their competitors. This is true of luxury goods brands, for example, where years of legacy and exclusivity have driven resilient demand from global consumers.
This has so far remained true of some of our key holdings, despite their exposure to China where gross domestic product (GDP) growth is slowing. Europe is home to many exceptional companies we describe as ‘giants in niches’, with global dominance in their field. However, Europe is also home to industries we believe see high levels of structural pressure, such as banks and automotive.
As the region is not immune to politically induced volatility, we believe it continues to make sense to take an active approach in these markets, using periods of volatility to allocate to companies with strong business models and attractive fundamentals at compelling valuations.
At present, we see plenty of these opportunities and have a pro-cyclical tilt in our portfolio, expressed through consumer and industrial cyclical stocks. The recent earnings season has proved encouraging for the investment case in many of these holdings and we believe further earnings upgrades for high-quality businesses are possible in 2020.
David Walton, manager of the Marlborough European Multi-Cap fund (GB0001719730)
While Europe will enter 2020 contending with subdued economic growth and a considerable degree of uncertainty, the diverse nature of the region and its companies means it continues to present interesting opportunities.
Familiar risks remain: the slowdown in global growth, China’s economic deceleration, US-China trade tensions and Brexit uncertainty. And there are new ones to consider. Faltering economic growth in the US could teeter into recession. This would not only affect the global economy, but would also have a direct effect on European exporters, compounded by the possibility of a weaker US dollar making their products more expensive for American buyers.
Germany, Europe’s economic powerhouse and so long a poster child for growth, has suffered a serious slowdown in 2019 that could become more serious in 2020. With German companies’ supply chains snaking over the continent, that would be bad news across the region.
The fact that these concerns are widely understood by investors is in itself reason for a degree of cautious optimism. These negatives are, to an extent, ‘priced in’, leaving scope for a positive reaction to better news.
The uncertain environment is also creating interesting opportunities. While overall equity valuations look high compared with historic averages, investors have been neglecting well-managed small growth companies because of concerns about the economic climate. These companies often trade at large discounts, despite strong potential for earnings growth.
Political concerns can also lead investors to overlook decent businesses, creating opportunities in the Italian IT services sector, for example, because investors are giving the country a wide berth.
Across Europe, the shift to 5G data networks is creating opportunities in the telecommunications arena, while technology companies are benefiting from increased spending by businesses seeking to reduce costs and increase productivity.
Despite the uncertain backdrop for the year ahead, there are still well-managed European companies with the potential to achieve strong earnings growth.
JAPAN
Dan Carter, manager of the Jupiter Japan Income fund (GB00B0HZR397)
Get ready for Olympic fever as 2020 will see Tokyo host the pinnacle of sporting competition for the first time since 1964. While the event will no doubt command plenty of column inches, the time to invest in the theme was during the construction phase, and that is long gone. Fear not, though; beneath the sport-centric headlines there are other potentially Olympic-sized themes to which investors will want to be alive.
The first is the potential realisation of huge latent corporate value. That Japanese stocks are cheap is nothing new: the price/earnings multiple on the market has been consistently below that of the US and Europe for the past half-decade. For much of that time overseas investors have been selling, rather than buying, Japanese equities. Meanwhile trade purchases of whole businesses have been extremely rare. In short, there have been few takers despite the apparent value. This appears to be changing on a number of fronts; both private equity companies and activist investors are smelling opportunity while Japanese companies are taking matters into their own hands by buying up their own shares in quantities never seen before. Expect this to continue in 2020 with potentially striking results.
The second story investors should be aware of in 2020 is the increasing role that trade is playing in the strategic jostling of the US, China, Japan and other major powers. While 2019 was characterised by highly visible tariffs and tweets, expect 2020 to usher in a much more subtle, if no less brutal, phase of the trade war. In Japan’s case this will revolve around the government’s desire to protect its strategic corporate assets, especially those with crucial leading technology, from predatory foreign buyers. The government must tread carefully here to ensure that the potential for a rise in M&A and action from activist investors is not hamstrung by red tape.
The third and final unheralded story of which investors should be aware comes in the form of the entirely new businesses queuing up to list in Japan. Many of these are not just new businesses but new concepts, based on information rather than hard assets, which could be wildly profitable if successful. These businesses inject much needed vibrancy into the Japanese equity market in sharp contrast to its staid image. Great investment opportunities are likely to be found in this new crop of potential unicorns but success is far from guaranteed and there will be plenty of nags too.
CHINA
Greg Kuhnert, co-head of the 4Factor investment team at Investec
Geopolitical and macro noise surrounding the asset class in 2019 is likely to persist in 2020, as these headwinds continue. This has driven some short-term volatility in Chinese equities, but when looking at the year so far the MSCI China Index is up 7.6 per cent as of November, while the MSCI China A Onshore Index is up 24.6 per cent.
This is despite a backdrop of disappointing economic data, such as exports and industrial production figures. Looking forward to 2020, however, we can already see some signs of the economy bottoming out. Manufacturing data, for example, incrementally improved in September. Investors can also feel some reassurance that globally central banks are easing. In China, we are seeing selective easing, both on the monetary and fiscal side, but in a very controlled manner.
When looking at the two countries engaged in a trade war, they have something in common. Taking into account first-half earnings and the run rate globally, both the US and China stand out as being ahead of run rate. This feels counter-intuitive, but highlights the fact that China isn’t significantly dependent on exports, both from a domestic economic growth and corporate earnings perspective.
Companies have been reporting better-than-expected earnings for two consecutive quarters now. Where there have been downgrades, the pace of these has slowed. Moreover, valuations are quite cheap and trading below their long-term average. The market is trading at around 12.9 times on a price/earnings basis on this year’s earnings and 11 times on next year’s.
A key risk for 2020 and beyond is the realignment of the relationship between China and the US and how the trade tensions progress. In our view, currently the direct impact on the companies that we invest in is limited, but if, for example, the US continues to put more Chinese technology companies on restricted lists, it could have further implications. This should be considered in light of China’s own moves towards achieving technological prowess, as shown by the launch of the Nasdaq-style STAR board to encourage more Chinese companies to come back home and list onshore.
ASIA EX JAPAN
William Lam, co-head of Asia and emerging market equities, Invesco
As the trade war trundles along, the possibility of a perfect resolution seems increasingly unlikely with the impact felt in regional and global markets to echo for some time. Recent tensions elsewhere in the region, including riots in Hong Kong and a growing trade rift between Korea and Japan, have put further downside pressure on market sentiment while the growth outlook remains opaque. That said, it’s reasonable to assume that we could get incrementally better newsflow over time. More positively, moves by Asian central banks to take a more accommodative policy approach and pro-growth initiatives of governments from across the region, should offer some support to local markets.
In China, the central government appears committed to stabilising the economy, but remains conscious of the need to shore up growth while at the same time avoiding the large-scale credit-fuelled stimulus that flooded the system in 2009. This balance between avoiding a sharp slowdown in growth and avoiding excessive stimulus is becoming more delicate. So far, stimulus measures have been moderate. Should trade conditions worsen, the central government has the ability to push through targeted fiscal and monetary stimulus measures in order to cushion growth. The People’s Bank of China has already trimmed lending rates and banks’ reserve requirements several times this year, and still has room to manoeuvre if economic indicators continue to disappoint.
Finally, although there are ongoing concerns over trade tensions and the health of the global economy, Asia remains the biggest driver of global growth, with solid economic and corporate fundamentals. In particular, we believe there is an impressive trend of greater capital discipline being displayed by companies across the region, with strong balance sheets and improving free cash flow generation, which we seek to capitalise on.
EMERGING MARKETS
Gary Greenberg, manager of the Hermes Global Emerging Markets fund (IE00B3NFBQ59)
Slowing global economies coupled with heightened geopolitical risks have led to a deteriorating economic outlook. Globally, central banks are in an easing cycle and bond yields are likely to remain lower for longer. Global PMI data is already pointing to a manufacturing recession in many countries. We expect the services sector to follow suit, US employment levels to start to fall, and that monetary responses will be insufficient to spark a global rebound.
Recognition of a global synchronised downturn could weigh heavily on cyclical stocks, pushing them towards historically low valuations. Quality names should perform relatively better. This downbeat economic scenario could create opportunity in the cyclical part of the market, as we anticipate a consensus would form around the need for a fiscal spending boost, starting in Europe, spreading to the US and from there to emerging markets over the next 18 months. Until this scenario becomes evident, however, the portfolio will remain tilted towards quality. In any case the fund already maintains some exposure to quality cyclicals that will benefit when the global economy turns up.
Today, few emerging market countries exhibit the type of macro vulnerabilities evident in 2013, and most offer positive interest rates after adjusting for inflation. The combination of a valuation discount, slowing global growth and the resulting lower yields should be particularly beneficial for asset prices in economies that can grow despite global headwinds such as trade wars.
Our bottom-up growth estimates for the portfolio indicate good medium to long-term prospects, as it is well represented in secular areas of growth, such as the roll-out of 5G, digitisation, logistics, premiumisation and demand for healthcare and financial services.
Chetan Sehgal, lead manager of the Templeton Emerging Markets Investment Trust (TEM)
Emerging markets weathered increased volatility in 2019, driven primarily by ongoing US-China trade-related events, central bank monetary policies and concerns of slowing global economic growth. However, emerging markets have been resilient in the face of these negative macro events. While they continue to trade at a wide discount to developed markets, we believe that the underlying fundamentals do not justify these valuations over the longer term, especially since the long-term structural drivers of emerging markets remain intact.
Emerging markets continue to demonstrate strong economic potential, with undervalued currencies, high foreign exchange reserves and more favourable debt levels than their developed-market peers. Emerging market fundamentals and corporate governance have also been improving.
In our view, 2020 could be another strong year for earnings in emerging markets. A lot of cyclical recoveries have started to emerge, and they should fully materialise in 2020. These conditions, when paired with improving corporate governance that includes dividend payouts and buybacks, present an increasingly attractive long-term buying opportunity for investors and contribute to our optimism.
The US-China trade conflict has been dominating headlines, however the impact of the conflict has not been limited to China; rather we have seen global implications. We remain cautious and expect continued market volatility until a more comprehensive deal is finalised.
Furthermore, with many emerging market companies world leaders in the areas of financials, technology and in the production of consumer goods, we expect technology to be a primary driver, whether manifested through world-leading semiconductor manufacturing, e-commerce or other areas. The growing adoption of technology and growth of digital platforms have also helped to create new goods and services for consumers across emerging markets, while at the same time creating growth opportunities for many emerging market companies and investors. In addition, consumerism in emerging markets is expected to drive growth in many regions, as growing middle-class populations and increasing affluence continue to spur demand for high-end products.
GLOBAL BONDS
Bob Jolly, head of global macro at Schroders
Bond investors as a group are probably best described as more “glass half empty” than half full. Bull markets in bonds are usually associated with economic or geopolitical troubles somewhere in the world. Yields fall in anticipation of the troubles being severe enough to warrant interest rate cuts, cheering holders of bonds, since bond prices rise as interest rates and yields fall.
However, despite 2019 seeing a continuation of falling bond yields, the world according to equity and corporate bond (or credit) investors was in relatively rude health. Equity markets rallied strongly, and credit spreads (yields on corporate bonds relative to lower risk government bonds) compressed to near their historically tightest levels.
So if investors in these riskier assets were sufficiently cheerful to chase prices higher, why did bond yields continue falling?
All three of the following factors could be cited to explain the decline in bond yields in 2019, but only one can explain the resilience of risk assets:
- Ongoing uncertainty over US-China trade – clearly suppressing global manufacturing confidence and investment.
- A lack of inflation.
- Despite near or record low levels of unemployment, central banks falling over one another to add fuel to the fire via lower interest rates and keep the economic expansion going.
All other things remaining equal, trade uncertainty should reduce investor appetite for riskier assets such as stocks. Low inflation is arguably good for some, but not all risk assets. Only ever-lower interest rates really explain why both bonds and risky assets had such an enjoyable year.
However, a growing list of central bankers have suggested the elixir of interest rate cuts and in many places the pursuit of unconventional policies such as quantitative easing (QE) is largely exhausted. Concerns are growing over an increasingly long list of late-cycle indicators flashing amber and in certain cases red.
Is recession inevitable or is there something that could keep the gravy train of economic expansion rolling and continue to confound the bears?
There appears to be two likely sources that could maintain economic confidence: fiscal policy and the US dollar. Historically, easing fiscal policy, especially spending money on infrastructure, has acted as a positive catalyst for growth. Governments could use super cheap funding to invest in infrastructure with the expectation of boosting demand and ultimately productivity.
The US economy has been more resilient than the rest of the world over the past year or so, largely because trade, and especially net exports, represent a relatively small part of its economy. However, evidence is building to suggest the US is not immune to external developments. It looks increasingly likely that the US economy will slow, probably leading to more aggressive easing from the Federal Reserve (Fed), and in turn weakening the dollar. Should the US cut rates further, the interest return on certain assets, bonds in particular, will fall. This will make them less attractive to foreign investors resulting in lower demand for US dollars.
A weak dollar, could indeed grease the wheels of global trade and by extension give the world a significant growth boost.
Ariel Bezalel, manager of the Jupiter Strategic Bond fund (GB00B4T6SD53)
It’s hard to see what could lift the global economy in 2020. We expect more of the same: anaemic global growth, ever-loosening monetary policy and heightened political risk, while the powerful deflationary drivers of an overly indebted world, ageing demographics and technological disruption continue to operate in the background.
In July this year, the US economy officially entered its longest economic expansion in history. Although the Federal Reserve has framed sluggish growth as a mid-cycle slowdown that can be rescued by small tweaks in monetary policy, I see multiple pressure points that suggest the global economy is reaching the end of this cycle, many of which are closely tied to China’s economy, which has slowed down considerably this year.
Over 60 per cent of countries are now technically in a manufacturing recession, including the US, which is little wonder considering China is the main driver of total GDP growth. The trade war is exacerbating the slowdown, both in China and globally, but the roots of the weakness are more structural in nature. It’s the combination of a slowing Chinese economy with the effects of the Federal Reserve’s monetary tightening policy over the past two years (after a decade of lulling markets into complacency) that has now started to filter through to the global economy.
Could China reflate the global economy as it has done several times after the 2008 financial crisis? I think it’s highly unlikely. Officials in China have made it clear that aggressively easing policy is not on the table. The country already has high debt levels and an inflated property market, and each round of stimulus since 2008 has been less and less effective at boosting the economy. Surging inflation due to higher pork prices this year, a result of the ongoing swine flu epidemic, has further constrained the central bank’s ability to ease monetary policy.
Turning to the US, the country is on course for an imminent earnings recession: fourth-quarter earnings, together with third-quarter, are forecast to be negative. According to a recent survey, half of the chief finance officers in the country are expecting a recession by the November 2020 presidential election, which is likely to have a significant impact on investment spending. Credit markets are also showing signs of stress, as recession concerns have reduced demand for lower-rated high-yield debt at risk of downgrades. This fragile dynamic is particularly concerning considering corporate debt is at an all-time high at around half of national GDP, with trillions of dollars having been funnelled into unproductive share buybacks. The tech sector seems particularly vulnerable within this context, as well as to political risk given bipartisan support for breaking up the major tech companies.
With all this mind, we expect macroeconomic data around the world to continue to deteriorate in 2020, which should force central banks to keep cutting interest rates, pushing bond yields lower and lower. In fact, in the absence of an inflationary shock, we think US Treasury yields may even fall to zero over the next 12-18 months, converging with the negative yields already seen in Japan and Europe. We therefore continue to run a defensive barbell strategy that balances liquid, AAA-rated US and Australian government bonds with highly selective, short-duration credit and special situations. Despite our cautious approach, we continue to find new opportunities in global bond markets, from Greek and Egyptian sovereign bonds to US and Brazilian beef and poultry producers.
