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Global equity investors spent most of 2019 worried that the equity bull market would come to an end. Money-market deposits hit all-time highs during the year.
The bull market continued nearly unabated, despite investors pulling a significant amount of money out of global equities on fears about the economic outlook and unresolved political issues. While many investors remain anxious, we see ample reason for people to remain invested in global equities in 2020.
For one, the global economy remains fundamentally sound. Although the expansion has been one of the longest on record, age alone does not lead to contraction. Economic data in fall 2019 showed softening in the manufacturing sector, partly tied to trade issues.
However, the global economy has changed and is now much more based on services, than on manufacturing, even in emerging markets. This makes the economy more stable.
So, even while manufacturing has hit a rough patch, the consumer (especially in the US) has proven to be resilient.
There are some risks stemming from populist politics and the significant amounts of debt sitting on corporate balance sheets.
However, in broad terms, interest rates are low, there are only limited signs of inflation, and several major global central banks have taken steps in 2019 to support growth over the coming year.
This low interest-rate environment is a crucial factor supporting risky assets such as equities. We believe the potential for rates to continue to stay low or fall further over the course of 2020, should create a constructive environment for equity markets. Global equity valuations appear reasonable in our analysis. In late 2019, major global equity markets were trading below their long-term average forward P/E ratios. The only exception was the US, which traded at a slight premium.
Innovative companies are typically wealth creators that can increase productivity and can provide investors with a strong performance potential over the long term.
Not only is innovation accelerating, opening a wider set of potential investment options, but it is also expanding across sectors, from healthcare and industrials to financials and consumer.
We see upside potential in equities in international, developed and emerging markets. Generally, we believe emerging markets are more appealing than developed markets, as the economic growth differential between the two widens in favour of emerging markets.
For 2020, the IMF has forecast 4.6 per cent emerging market economic growth, nearly triple the 1.7 per cent estimate for developed markets. With the US Federal Reserve taking a more dovish monetary policy stance, emerging markets have switched to expansionary policies to stimulate their economies.
On a valuation basis, emerging markets also have been trading below their long-term average discount to developed markets, despite improving cash flows, dividend payout ratios and corporate deleveraging.
We see opportunities in Brazil, as the country has tackled pension reforms; in India, as its corporate tax cuts boost investment; and in South-East Asia, as consumer spending rises and some benefits result due to trade moving away from China.
The writer is Executive Vice-President, and Head of Equities, Franklin Templeton
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