LONDON, 21 NOVEMBER 2019 – ‘Unchartered territory’ can be an overused phrase, but RBC Wealth Management, part of Royal Bank of Canada (RBC), believes it applies to the current business cycle which became the longest since World War II in July 2019. While the economy is in the later stage of this expansion, like the early-cycle and mid-cycle phases before it, RBC Wealth Management thinks this stage could prove to be longer than usual.
In the 2020 edition of RBC Wealth Management’s Global Insight Outlook, the bank’s experts predict that central banks’ accommodative monetary policies, as well as some additional fiscal stimulus, will keep most developed economies growing through 2020 and probably longer. This should engender growth in corporate earnings, dividends and buybacks. Share prices should follow all these higher. Nevertheless, with some recessionary indicators flashing caution, RBC Wealth Management’s house view has become less tolerant of portfolios carrying an overweight or above target commitment to stocks. Investors should not be complacent.
said: “We are in ‘unchartered territory’ – not only is this due to being in the longest expansion in over 70 years but also as very low, or even negative, interest rates are likely to persist. Global central banks will look to harvest the fruits of their labour in 2020 after a series of rate cuts and other stimulus measures were planted to close out 2019. While growth and inflation expectations for developed markets are now on the ascent, recession fears and geopolitical concerns are likely to linger. Markets mostly expect central banks to remain on hold for the next year, but the bias will remain toward further easing rather than a return to tightening, anchoring yields across the global landscape near historical lows.”
continues: “We have a constructive outlook for stocks in 2020. Corporate earnings will increase as will dividends and buybacks, pushing share prices higher which should transform the gloom of 2019 into a less fraught outlook for the economy and stock markets. What it shouldn’t change is investors commitment to vigilance. U.S. recessions have historically been associated with equity bear markets in all the developed economies, but we reckon the start of the next U.S. recession looks to be a year or more away.”
However, RBC Wealth Management believes that there are at least two complicating factors facing investors.
Firstly, while renewed monetary/fiscal stimulus is breathing some extra life into the longest ever US economic expansion, it is unlikely to kick GDP growth up into a higher gear that would offer the prospect of several successive years of above average earnings growth. With P/Es at 18x next year’s estimate for S&P 500 earnings, the risk/reward profile for the stock market would worsen were multiples to move even higher on the strength of growth expectations that had a low probability of being achieved.
Secondly, bull markets have usually peaked before the recession starts at times as much as a year before. So, even conviction that the next recession won’t arrive before 2021 still leaves open the possibility the market may set its peak for this cycle in the coming 12 months.
continues: “For ten years we have been well served by the idea that portfolios should maintain a full, target-weight exposure to equities as long as there was no U.S. recession in sight. We continue to be of that view. We recommend portfolios carry equities at a pre-determined long-term target weight. However, without the prospect of a return to more robust economic and earnings growth we have become less tolerant of portfolios carrying an overweight or above-target commitment to stocks whether by design or as a result of strong markets. If and when the weight of the evidence eventually moves the probabilities of recession/bear market to unacceptably high levels it will be tempting to rationalise away the bad news. When that time arrives that temptation should be resisted.”
Finally, the 2020 edition of RBC Wealth Management’s Global Insight Outlook highlights that a new industrial revolution may be upon us where advances in artificial intelligence and cloud technology set against an uncertain geopolitical and environmental backdrop, force industrial players to increase their agility in order to survive. RBC Wealth Management suggests that this is often not reflected in conventional financial analysis which forecasts returns for the future, and then assigns a valuation based on those estimates usually assuming no major structural changes of the external forces that shape the economic and business landscapes.
concludes: “Traditionally, industrials have not been the focus of investors at this late stage in the economic cycle. Indeed, this time around, the trade war anxiety and tariffs pressure have increased the sectors’ woes. There has been an epidemic of operating misses since Q2 2019 and this may well continue in the short term, with manufacturing momentum still quavering. Sector CEOs are particularly cautious. But there-in may lay an opportunity. The industrial sector tends to outperform when Value beats Growth. It is less vulnerable to fears of a potential Democrat sweep in 2020 than other cyclical sectors. Industrial companies are also actively buying back stocks and could benefit should the trade war enter a détente phase in 2020, ahead of the presidential elections.”
Jamie Brownlee, Greentarget / +44 (0) 20 7324 5498 / email@example.com
About RBC Wealth Management
RBC Wealth Management is one of the world’s top five largest wealth managers*. RBC Wealth Management directly serves affluent, high net worth and ultra high net worth clients globally with a full suite of banking, investment, trust and other wealth management solutions, from our key operational hubs in Canada, the United States, the British Isles, and Asia. The business also provides asset management products and services directly and through RBC and third party distributors to institutional and individual clients, through its RBC Global Asset Management business (which includes BlueBay Asset Management). RBC Wealth Management has C$1.05 trillion of assets under administration, C$738 billion of assets under management and more than 4,800 financial consultants, advisors, private bankers, and trust officers. For more information, please visit www.rbcwealthmanagement.com.
*Scorpio Partnership Global Private Banking KPI Benchmark 2018. In the United States, securities are offered through RBC Wealth Management, a division of RBC Capital Markets, LLC, a wholly owned subsidiary of Royal Bank of Canada. Member NYSE/FINRA/SIPC.