When to walk away

As the decade begins to wind down, the investment outlooks start to crank up. The imminent arrival of 2020 gives investment banks and asset managers the chance to run the rule over the next year and beyond - and they’re rarely short of a word or two on that front.

A new decade gives more scope than usual for pontification. And one fund group has already set out its stall: Robeco Asset Management’s 2020-2024 outlook was published earlier this month.

In fairness, this document isn’t a novelty. The firm’s Expected Returns series is published annually, this time coming in at a weighty 120 pages. 

The good news is that its analysis suggests global equity valuations, on the whole, “appear less stretched compared with last year”. Its base case is that a US recession will be avoided for now - but only until 2021/22, when the Fed belatedly tightens in response to rising inflation expectations.

From an asset allocation perspective, that means risk-taking “may be rewarded initially” before becoming more challenging. In euro terms, annualised returns for every major asset class will be below long-term averages, but risk assets will still be in the black.

Notably, while Robeco’s analysis finds the bull market is now less driven by global factors than it once was, it’s not US tech exuberance that has replaced it. Sector exposure still accounts for 25 per cent of global returns, broadly in line with levels seen ten years ago. 

Despite that, one of the firm’s conclusions appears increasingly inescapable for allocators the world over: a recommendation to diversify away from US equities. 

There’s a growing consensus on this point - Capital Economics has suggested the same thing this very morning. But the question of when to bite the bullet is a tricky one for DFMs.

As Robeco implies, US earnings may continue to be more resilient than other regions over the short to medium term. And it finds the relative premium paid for US stocks, while still elevated, has dipped over the past year. Trends like these will make a hard decision even harder still in the coming months.

Overseas unease

One simple, unheralded reason why the US remains beloved by equity investors is the relative ease of investing there. There is, for instance, no likelihood that UK-based wealth managers will find their US exposures falling victim to a crackdown on overseas investment. 

Emerging markets are typically used as a compare-and-contrast example here. Now there's the possibility of a similar clampdown in what was once discretionaries' favourite satellite bet - Japan. As it stands, foreign investors must submit a pre-purchase report when buying 10 per cent or more of companies viewed as sensitive to national security. The country’s Ministry of Finance has proposed lowering this to just 1 per cent. 

In theory, that could have implications for many of the asset managers that DFMs use to invest in the country. 

It should be noted that an exemption is planned for “portfolio investors” - though a precise definition of this term has not yet been quantified. And initial reaction has been fierce: the head of the Tokyo Stock Exchange has described the proposals as “idiotic” and unlikely to ever happen. But floating the idea of such changes may have an impact on its own. 

The Japan story in the Abenomics era has been predicated on just that: a story. It's a narrative of changing attitudes, improving corporate governance, and a general embrace of Western-style approaches to investment. At a time when global investors, UK discretionaries among them, are starting to cool once again on the country’s attractions, a shift of this kind won’t help improve attitudes. 

Yielding ground

Equity income investors received a jolt of their own this morning: dividend cover globally now stands at its lowest level in a decade, according to Janus Henderson, with the UK market taking the unwanted prize of joint-lowest cover on a regional basis. 

Investors’ desire for dividends has led to payouts being maintained, but profits are failing to keep pace. And some companies, faced with that unwelcome contradiction, have bowed to the inevitable: separate figures from the Link UK Dividend Monitor show that underlying UK payouts fell by almost 3 per cent in the third-quarter, the worst figure for three years. 

But the real underlying story is that very little has changed for dividend investors: yields are still far above those on offer from the likes of bonds, and even cuts on a par with those seen in 2008 wouldn’t drag them back below long-term averages. Late-cycle risks are rising, but not all of them will spell disaster for wealth managers.