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Investment themes for 2020

Over the past decade the general rule of profitable investing was to maximize long positions in almost every asset class. We had central banks providing stimulus which was supported by increased globalization and cheap valuations to start with, across the board. However, many of these factors are reversing as we enter the late cycle and we ought to be more selective with our investments. Our view is that we are in the late cycle, but not end cycle which would require a different approach.


Going into 2020, investors need to be mindful of new pains that did not exist in 2018. We have plenty of headwinds - including but not limited to Brexit, the US-China trade war, slowing economic growth, upcoming US elections and various regional geopolitical tensions. However, we researched on some ideas which we feel will continue to play well in 2020 and beyond.


Tech sector is a twist in the tale


We all know that the US technology stocks have been tagged as over-valued time and again over the past few years; but we are starting to see that some of these technology companies are disruptive in nature and arguably have some defensive characteristics.


Even Warren Buffett is looking at these companies from a different eye, calling some of the blue chip tech stocks as companies with "ideal business" which give very high returns for very little capital. While Buffet has generally invested in more capital-intensive businesses like railroads, utilities and manufacturers, he also believes companies like Apple, Google, Amazon and Facebook "really don’t need any money" to run their businesses.


Now combine that with the fact that earnings in the tech sector fell less than earnings for the overall S&P 500 index in 2009 and in 2019. We don't see any a lot of households giving up their Amazon Prime membership come next recession, and the cash giant's web services business is arguably more sticky for small businesses. While stock picking will remain crucial for the tech sector, we believe the Tech sector could be a crucial play for portfolio allocation in the late cycle scenario.


Sustainable investing will only get bigger


If a company can figure out how to solve a global/world problem while making profit, it is very likely to be picked up by investors sooner or later. We believe that we will continue to see new and more accessible sustainable investing products and there is no doubt that we are seeing growing attention from different geographies, investor types, and generations in this asset class. Younger investors demand sustainable investment products at record numbers. A 2017 survey by Morgan Stanley’s Institute for Sustainable Investing found that 86% of millennials are interested in sustainable investing, and we can can only see that number to be higher in 2020.


We believe this a cross-play with tech sector, as companies which can use good technology to solve real problems will be gold over the next decade. For example, according to the UN 800 million people across the globe suffer from chronic hunger and this number is steadily increasing. Although the planet produces enough food each year, there is a substantial amount that this is wasted.


It has been researched that implementing internet of things (IoT) monitoring devices in the entire agricultural distribution ecosystem can help gain insight into crop health in a bid to improve yield quality, which in return would reduce the quantity of lost and damaged food which could play a role in eliminating world hunger. Now there is not doubt that IoT will empower globalization but relies on the 5G technology. According to Statista, IoT connected devices will grow from an estimated 26.6bn figure in 2019, to about c80bn by 2025.


The bottomline is that we believe investing in companies that help towards a real cause could be the biggest play for the next decade, and the realms of sustainable investments are only starting to get explored.


Cash is your best friend amid high volatility


The only way to make the best use of an over-stretched market and unexplainable valuations is by making cash your friend and look for opportunities when the prices fall. According to the UBS Investor Watch for November, 25% of the average assets of rich investors are currently in cash and we believe there is no reason for you to be allocating any lower than that.


Given that markets remain uncertain and volatility is likely to rise in 2020, we believe the "dry powder" is essential to exploit investing opportunities and they are more than likely to appear given the current situation. While you might believe such an allocation towards cash in a low-yield environment is the wrong call, we believe cash can help you to stick with your investment strategy through all sorts of economic, market, and political environments as a well of reserve capital into which you can dip, and which serves as an anchor when markets fall, is a source of comfort that little else in financial life can offer. After all, it is the only thing that matters when markets crash (and real assets).


S. Khan

Head of Investment Research

© 2019 by Acinox

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