A reasonable year for equities, a difficult one for bonds and property, and an uptick in commodities should be on the cards for 2020, according to Chelsea Financial Services’ Darius McDermott. 
“Globally, 2020 is likely to be dominated by the US presidential elections – and Donald Trump’s actions, tweets and statements during the campaign,” said McDermott, managing director at Chelsea Financial Services. “In the UK it will once again be Brexit.”
As such, McDermott said he is expecting next year to be a “reasonable” year for equities, although it will not be as positive as 2019 because valuations are not as compelling.
On equities, McDermott (pictured) said that US president Trump “has managed to both tie his presidential success to the US stock market and influence its direction”.
He added: “In his quest for a second term, I believe he will do everything in his power to both avoid recession and keep the stock market climbing higher.
“I expect some ‘first phase’ resolutions in terms of trade wars, which will be positive for both the US and Asia including Japan.”
McDermott said the fact that the Federal Reserve and other central banks have moved from a rate-tightening stance towards undertaking more fiscal stimulus should also prove positive for equities.
However, it is in the UK where McDermott sees the most opportunity.
“In the UK, we’ve already seen a relief rally on the back of the general election,” he said. “If global fund managers believe that the outlook for the UK is now more positive, their reallocation to UK equities – even back to a neutral positioning – should gently push the stock market higher.
As such, McDermott has recommended three UK funds for 2020: JOHCM UK Dynamic, Jupiter UK Special Situations and Montanaro UK Income.
The five FE fundinfo Crown-rated JOHCM UK Dynamic fund is headed up by Alpha Manager Alex Savvides. It has a value approach, targeting businesses that have identified problems and are in the process of solving them, with a bias towards dividend-paying companies.
The £2.1bn Jupiter UK Special Situations fund is overseen by veteran manager Ben Whitmore, who also takes a value approach to investing.
Last up is the £474m, four Crown-rated Montanaro UK Income fund, which is overseen by Charles Montanaro. It focuses on small- and mid-cap companies.
Performance of funds over 3yrs
Source: FE Analytics
Over three years, Montanaro UK Income, JOHCM UK Dynamic and Jupiter UK Special Situations have made total returns of 45.27 per cent, 26.54 per cent and 18.85 per cent respectively.
McDermott is less bullish about fixed income, where he struggles to find value.
“Many bonds are negatively yielding or close to zero, so we have stuck to the higher-yielding end of the spectrum, willing to take on some extra credit risk in return for a half-decent income,” he explained.
“Careful selection is required, however, and in our VT Chelsea Managed funds we have favoured very experienced managers with specific skill sets and funds with decent yields.”
For investors looking to add fixed income exposure, McDermott has opted for Jupiter Strategic Bond, TwentyFour Dynamic Bond and Man GLG Strategic Bond.
The £4.2bn Jupiter Strategic Bond fund is overseen by Alpha Manager Ariel Bezalel, who uses the full flexibility of the strategy to deliver strong returns. It has a yield of 3 per cent.
The team-managed, five Crown-rated TwentyFour Dynamic Bond fund invests across the range of fixed income assets and other debt instruments. It may also make use of other instruments such as derivatives and take short positions. The fund has a yield of 3.47 per cent.
McDermott’s third pick is the £90.4m Man GLG Strategic Bond fund, managed by Alpha Manager Craig Veysey and Francois Kotze. It targets an above-average level of return and has a yield of 3.47 per cent.
Performance of funds over 3yrs
Source: FE Analytics
During the past three years, the TwentyFour Dynamic Bond fund has made a total return of 16.68 per cent, while Jupiter Strategic Bond is up by 12.38 per cent and Man GLG Strategic Bond has made 11.78 per cent.
One unpopular asset class in recent years has been commodities, as low global growth has reduced demand for raw materials. However, that could change in 2020, according to McDermott.
“Commodities have been out of favour for a number of years now but increased fiscal stimulus around the world could help stimulate demand,” he said. “Extra infrastructure spend from developed countries and the shift to renewable energy could finally be the lift the asset class needs.”
To take advantage of any potential upside for the sector, McDermott has highlighted BlackRock Gold & General, BlackRock World Mining and JPM Natural Resources.
The £998.2m BlackRock Gold & General fund is headed up by Evy Hambro and Alpha Manager Tom Holl, who target long-term returns, investing at least 70 per cent of the portfolio in companies that derive a significant proportion of their income from gold mining or other commodities, such as precious metals.
The £838.8m BlackRock World Mining Trust is also overseen by Evy Hambro, along with Alpha Manager Olivia Markham. It invests in mining and metal assets worldwide.
Finally, the £569.3m JPM Natural Resources fund – overseen by Neil Gregson and Christopher Korpan – invests in companies involved in the production and marketing of commodities.
Performance of funds over 3yrs
Source: FE Analytics
BlackRock World Mining Trust was the best performer of the three over three years, with a total return of 26.85 per cent. Meanwhile, BlackRock Gold & General was up by 23.59 per cent over the same period and JPM Natural Resources made a gain of 13.72 per cent.
An asset class that McDermott is less keen on is property, which he said has been overshadowed by the recent suspension of the M&G Property Portfolio.
“In this environment, I would be tempted to keep any property allocation to property securities instead of physical property, and look to invest in other countries as well as, or instead of, the UK,” he explained.
“However, the general election result does give some relief to the UK residential property market. Transaction volumes should now pick up and bring new impetus. If the economy picks up and individuals feel more confident, this should also help.”
McDermott’s first pick in this space is the £61m TM Home Investor fund, which invests in the private rented sector across the UK and aims to capture UK house price growth. The fund is overseen by Hearthstone Asset Management’s Alan Collett and Stuart Springham.
One of two European property funds recommended by McDermott is the four Crown-rated, £286.1m Premier Pan European Property Share fund, managed by Alex Ross. It aims for long-term capital growth and to provide an income through investing in property companies.
The second name is the £200.7m four Crown-rated BMO European Real Estate Securities fund, overseen by Alban Lhonneur and Marcus Phayre-Mudge.
Performance of funds over 3yrs
Source: FE Analytics
Over three years, the BMO European Real Estate Securities fund has performed the best with a total return of 43.77 per cent. It is followed by Premier Pan European Property Share, which is up by 36.33 per cent, and TM Home Investor, which has returned 7.87 per cent.