After a broadly positive 2019 for markets, analysts and strategists polled by Trustnet remain sanguine about the prospects for the year ahead. However, UK investors will need to remain flexible and aware of several issues as they invest during 2020.
The US Federal Reserve’s rate-tightening regime that made 2018 so difficult was reversed in 2019, creating a far more comfortable year for risk-on investors. And there seems little appetite for normalisation of rates any time soon, particularly as the US enters an election year.
Performance of major indices in 2019
Source: FE Analytics
As such, there seem to be fewer big asset allocation decisions for investors to make this year.
The US presidential election in November is likely to be the one key event that will have a bearing on how the year plays out, according to Fairview Consulting’s Ben Yearsley.
“An interesting stat picked up recently said that incumbent presidents have always been re-elected as long as there isn’t a recession in the previous two years," he said. "The flip side of that stat is six out of seven times there has been a recession has meant the president has not been re-elected.
“I’m not massively bearish as I think Donald Trump will do everything he can to avoid a US recession and, assuming this plays out, we should be okay in 2020."
Andrew Merricks (pictured), fund strategy consultant at Skerritts Wealth Management, said a recession in 2020 is unlikely and the post-crisis bull run is likely to continue unchecked, for now. However, the longer the cycle continues, the more painful the downturn is likely to be, he warned.
“If we are entering the end game of this cycle as appears likely, it is almost certain to end with a recession,” he said. “Although we pat ourselves on the back for forecasting that we would not have one in 2019 and now we’re saying that it’s unlikely that we’ll see one in 2020 either, the uncomfortable truth is that, paradoxically, the longer the onset of recession is delayed, the deeper it is likely to be.”
While there are few signs of a recession on the horizon, UK investors still need to take measures to protect their portfolios in 2020.
Fairview’s Yearsley said that after several years of underperforming its global peers, sterling may continue to strengthen after making gains towards the end of 2019. And this could have a significant impact for UK investors in overseas assets.
As the below chart shows, since the EU referendum in June 2016, sterling has devalued against other major currencies.
Performance of euro, US dollar and Japanese yen in sterling since EU referendum
Source: FE Analytics
However, the return of a significant Conservative majority in December’s general election saw sterling strengthen amid market hopes for greater clarity over Brexit and the removal of political uncertainty. Any further progress on Brexit could see further strengthening.
“From a UK investor’s perspective, it’s the impact of currency and possibly a stronger pound that will harm returns for investment outside the UK,” explained Yearsley.
A victory for prime minister Boris Johnson and his Conservative party in December saw UK equities rally as markets welcomed the prospect of some direction over Brexit and a strong majority in Parliament to make progress.
As such, some strategists and allocators have begun highlighting UK equities as, potentially, the best performing asset class of 2020 - and particularly the domestic-facing stocks that have struggled most since the referendum.
But not all investors believe that things will likely change
“Our news has been dominated by Brexit for years now, but in a global sense it is less significant,” said Skerritts’ Merricks. “We have been underweight the UK as a market since 2016 and only have exposure now because as sterling investors there is a risk to not having some.”
Some strategists have also played up the prospects for UK small-cap equities as an area that should rally strongly given their perceived greater exposure to the UK economy.
Performance of indices since EU referendum
Source: FE Analytics
But Mazars chief economist George Lagarias (pictured) said that it is one area he will not be allocating to any time soon.
“We are currently not allocating to UK small-caps, as we feel markets would need greater certainty over Brexit before investors take advantage of growth potential for those stocks,” he said.
“For British domestic firms, which trade at a significant discount to the rest of the world to be fully re-rated, economic and earnings fundamentals need to improve materially and managements need to provide convincing answers of how they plan to sustain a competitive advantage post-Brexit, in a world suffering from secular stagnation.”
Having enjoyed full and unfettered access to the EU markets for more than three decades and acted as the “America’s gateway to Europe”, said the economist, the UK now needs the government to present a convincing vision of what post-Brexit Britain will look like in 10-20 years’ time.
Another area that Fairview’s Yearsley isn’t currently allocating to is open-ended commercial property funds, which he began switching clients out of towards the end of the year before the gating of the M&G Property Portfolio in December following “unusually high and sustained outflows”.
“This is not an ‘after the event’ move,” he said. “We switched clients out a few months back for a variety of reasons.”
Yearsley said the costs associated with UK commercial property funds, concerns over liquidity and the high levels of cash held on balance sheets, meaning that funds are often not fully invested.
He said the outlook for the sector is “fairly anaemic” with little or no capital growth for the next few years.
“With may open-ended UK direct property funds holding upwards of 25 per cent cash, returns will be miserly, whilst the suspension of M&G Property Portfolio has the potential to cause contagion across the sector,” he added. 
Finally, both Yearsley and Lagarias are less bullish on the fixed income space, despite a relatively “good” 2019.
Yearsley (pictured) said that developed market government bonds look “decidedly unattractive” while high yield bonds look “priced for perfection” at such a late stage of the economic cycle where defaults are more likely to rise.
Indeed, Lagarias too is also bearish on government bonds, albeit UK long- and mid-duration gilts where he said yields have been suppressed at near all-time lows.
“Promises of fiscal spending probably add to upward pressure on yields as investors might fear a deterioration of the UK’s ability to pay back its debts without devaluing its currency,” the Mazars chief economist explained.