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More fiscal stimulus likely from central banks.

According to the Chinese zodiac, 2020 is the Year of the Rat – a creature seen as a sign of wealth and surplus. However, as we settle into the New Year, many investors may well feel caught between a cat and a mousetrap as they hunt for returns in the sharemarket.

On the one hand, record low interest rates globally are depressing returns on fixed-income assets, leaving many investors struggling to generate income and moving up the risk curve.

On the flipside, increasing exposure to equities can seem daunting with major indices hitting all-time highs and many stocks trading at earnings multiples at the upper end of historical ranges.

Where can you source returns in this environment?

As well as being a symbol of good luck in Chinese culture, rats are also clever and quick thinkers, with a good sense of smell. As we dive into 2020, investors can take a lead from this resourceful attitude to analyse emerging macroeconomic themes and identify sectors of the market that have the potential to outperform. Here we outline key themes to watch.

(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this story).

Flicking the fiscal switch

With weak global growth and a dimmer outlook, central banks around the world will need to do more to stimulate their economies. However, with rates already at such low levels, central banks are running out of ammunition, raising the need for a new approach to boost growth.

In 2020 we see governments stepping in with a fiscal stimulus, either in the form of tax cuts or increased spending – more likely the latter. A boost in spending will be largely channelled into infrastructure, to the benefit of companies operating in or exposed to the sector.

On the local front it will probably be the well-established providers that benefit, such as international property and infrastructure group Lendlease, toll road operator Transurban, or engineering and contracting company CIMIC.

When looking abroad, individual stockpicking can be risky without deep knowledge of each market. A simple way to gain exposure to this theme in international markets can be through ETFs, such as the VanEck Vectors FTSE Global Infrastructure ETF or the Vanguard Global Infrastructure Index ETF.

Non-discretionary sectors to benefit from safe-haven status

In Australia and abroad, fears of a recession are growing as the international economy feels the squeeze of the US-China trade war. On top of that there are clear signs we are in a “late cycle” stage of the economy, which means growth is slowing and it is important to position your investment portfolio accordingly.

Past performance tells us that non-discretionary spending sectors such as healthcare, consumer staples and utilities tend to outperform when economic growth slows. Regardless of the economic cycle or broader market conditions, people still need to eat, turn on power and have access to healthcare.

From a healthcare perspective, investors could explore well-established providers such as blood therapy and vaccine maker CSL, radiology and diagnostic imaging company Sonic Healthcare and hospital operator Ramsay Health Care.
Over the past 10 years (November 2009 to November 2019) the healthcare sector has risen 398 per cent, outperforming the broader market (ASX 200), which rose 46 per cent over the same period. The sector is averaging a yield of 1.20 per cent.

When exploring consumer staples, it could be worth considering companies that are positioned to benefit from global demand/supply trends, those strengthening their drought resilience and those that benefit as weather patterns normalise.

For example, agribusiness Elders is set to gain from improving demand for crop protection and fertiliser products, and also the recovery in cattle prices being driven by China’s insatiable appetite for Australian beef – one silver lining for drought-impacted farmers.

Australia’s oldest cattle producer, Australian Agricultural Company, also stands to benefit from increased demand once seasonal conditions improve. Other stocks in the staples sector to look at include almond grower Select Harvest, which could continue to rally from rising almond prices, and dairy producer a2 Milk Company, which is gaining a lot of traction from China’s consumer demand.

The consumer staples sector has outperformed the ASX 200 over the past 10 years, rising 73 per cent, and offers an average yield of 1.92 per cent.

On the utilities front, investors could look at APA Group. The utility sector has outperformed over the past 10 years, rising 95 per cent and is averaging a yield of 5.34 per cent.

In the current market cycle, it would also be worth considering exposure to “real” assets that tend to outperform when interest rates are low. An ETF that captures this is BetaShares Legg Mason Real Income Fund, which offers exposure to utilities, infrastructure and listed property stocks.

Japan and the UK likely standouts

Given investors tend to have a home-market bias, it is important to consider global markets to appropriately diversify your investment portfolio. When considering which markets to explore in the coming 12 months, Japan and the UK look a lot less expensive than their counterparts in the US and Australia and have the potential to outperform in 2020.

Since 2018 Japan’s economy has been slowing, reined in by sluggishness in exports and the manufacturing sector, even though domestic private-sector demand and non-manufacturers have been holding up well.

Heading into 2020 this is expected to reverse somewhat, with exports and the manufacturing sector to pick up, albeit modestly. Industrial production is tipped to rise by 1.1 per cent in 2020 after a 1.7 per cent fall in 2019. Combined with negative interest rates, the Japanese market is set for a boost.

For exposure to the Japanese market, without the difficulty and risk of selecting individual stocks, investors could consider the iShares MSCI Japan ETF, which invests in leading companies such as Toyota, Sony and financial services company Mitsubishi UFJ.

The UK market has been depressed because of an overreaction to Brexit. Once the deal is finalised the market is likely to rebound – suggesting there is value to be found for investors. The earnings per share of the UK market has been falling, but in 2020 is estimated to grow to 6.6 per cent and in 2021 to 6.2 per cent.

For exposure to the UK sharemarket and companies including Unilever, GlaxoSmithKline and Royal Dutch Shell, investors could consider the BetaShares FTSE 100 ETF.

Search for income will continue

With the Reserve Bank of Australia expected to drop official interest rates to 0.5 per cent in February and potentially as low as 0.25 per cent later in the year, the search for income will continue in 2020 as returns on fixed-income investments remain suppressed. This will result in investors continually considering opportunities higher on the risk scale, which was reinforced during ASX’s recent Investor and Adviser days.

While it is important to factor market movements and emerging macroeconomic trends into portfolios, investors should be cautious about constantly making changes. Given the complex nature of the current environment, it is easy to get distracted and caught up in market noise. But remember, the strategic asset allocation of your portfolio has the most influence in achieving investment goals.

For investors with the ability to take a broad view on emerging themes and remain measured through volatility, your returns will remain on track. This is one way to ensure 2020 is a truly prosperous Year of the Rat.