At OCM, when describing our investment approach in relation to market conditions and the wider macroeconomic backdrop, we often draw on the analogy of the asset allocation within our portfolios being like a car being driven down the motorway. When market conditions are what we would refer to as “normal”, we would be driving at 70mph in the middle lane of the motorway, with a well-diversified portfolio which is tailored to the client’s specific risk and return objectives. While driving, if we identify risks in the road ahead, we may reduce our speed and move into the slow lane, driving more cautiously while we wait for the road to clear. On the other hand, should we see a clear road ahead, we may increase our speed and move into the fast lane, allowing us to gain more ground on our journey while risks remain low.
Putting this approach into context, after enduring challenging market conditions throughout 2019, the global economy began 2020 on firmer footing, with the phase one US-China trade deal and the Conservative victory in the UK polls providing support for risk assets going into the New Year. With bright spots appearing in the economic data as downside risks abated, having been in the slow lane for the majority of 2019 due to considerable trade and political uncertainty, we entered the new year with a cautiously optimistic outlook, slowly increasing our speed to become back in line with normal market conditions. At the same time however, we continued to exercise caution, waiting for further indication that a recovery in the economic fundamentals would be sustained, and thus would continue to provide support to risk assets into the first half of the year.
As we now find ourselves two months into the year, we are encouraged by recent economic data releases on a number of fronts, with leading indicators suggesting that a broad-based recovery (albeit more muted given a subdued growth outlook) is now underway. Despite the Iranian missile attack in January and the recent coronavirus outbreak which have clouded the outlook so far this year, new data continues to provide us with evidence that after a period of economic weakness, the health of the global economy is beginning to improve, allowing us to return to 70mph and a more normal asset allocation.
While our outlook has improved somewhat, this is not to say that risks have disappeared. Moving further into the year, we are optimistic about risk asset performance, and expect to see a mild growth pickup supported by a stabilisation of the data, loose central bank policy and short-term de-globalisation, with domestic economies remaining strong. At the same time, although abating, Brexit and Trade risks are not yet removed, and we could see a resurgence in these risks, although it is our view that risks would be weighted towards the second half of the year. We see recessionary risks being kicked further down the road as a result of renewed central bank stimulus and optimism over trade, while the recent sell-off in large cap markets owing to coronavirus fears has brought valuations more in line with company fundamentals after Price/Earnings multiples became extremely stretched in 2019.
Key risks have been abating in recent weeks, however it is clear that the global economy remains in a fragile condition, and the recent coronavirus outbreak could pose a significant risk to any substantial recovery in economic activity. As we continue to monitor market movements and economic data releases, we remain optimistic about the outlook, with leading indicators continuing to suggest a pickup in global activity is underway. There is no doubt that recent coronavirus outbreak has clouded the outlook, however as it stands, it is our view that sentiment will recover and stimulus measures from central banks and governments around the world will offset the short term economic impact of the virus outbreak, which we expect to be confined to Q1. It remains our view that the initial market panic will abate, and therefore as it stands, we view this as a buy in opportunity as certain areas of equity markets become more attractively valued.
Overall, as we look ahead and consider our outlook for 2020, despite immediate virus fears, we remain optimistic given improving economic fundamentals and new opportunities following a drop back in valuations. Overall, while we expect that markets will continue to demonstrate high levels of volatility in the near term, once this dark cloud has passed, as the outlook brightens the global economy is likely to resume its recovery, building on upward momentum experienced earlier this year. For this reason, our medium to long term outlook remains unchanged, and we remain cautiously optimistic, driving ahead with our 2020 goals.
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