08 November 2019
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Since 1928, there have only been three years out of 21 election years, when the S&P 500 made a negative return. With a year to go until the next presidential elections in the US, Francois Savary, CIO, Prime Partners discusses whether it is time for investors to re-assess their exposure to US (& North America) assets.
How likely do you think that US stocks will perform well over the coming election year?
The election issue is an important one but it is difficult to forecast the outcome at this stage. We rely on our fundamental views to assess the US equity opportunity in 2020. We are convinced that due to valuation and our scenario of a stabilization in the world economy, the US should underperfrom its international counterparts. We would expect the US markets to produce a 5% total return in 2020.
How likely do you think leading indicators such as the inverting of the yield curve will actually be followed by a recession in the US in the coming year?
We have a 30% probability attached to a recession scenario in 2020, based on different indicators the Yield curve being one of them. We think that a recession should be avoided as the consumer is resilient due to the strong labor market conditions and due to the fact that the 2019 Fed easing need to feed (positively) into the economy over the coming quarters.
With an election year pending, how likely do you think it is that the Trump administration will do all it can to keep the local stock market buoyant?
Tne probability is high but what can you do. The room for maneouvre is limited as a fiscal stimulus does not seem credible, the monetary policy is in the ends of M. Powell. D. Trump could act on trade with an agreement with China, but is is largely priced in equities from now on. One weapon that could surprise the market and support equities (to a certain extent) is a foreign policy action (to weaken the dollar) that is not priced in yet.
Are you at all concerned by the level of the US fiscal deficit and its impact on supply of/demand for treasuries?
Yes we are, considering the fiscal deficit is an important issue to have in mind at least in the medium term. However, it seems that there is a global context that will maintain accommodative monetary policies alive, i.e. the risk of a major increase in the financing cost of the deficit. Nevertheless, in the long run the Trump tax cut will represent a threat that the US will have to deal with, especially in terms of foreigners accepting to finance it. It is not an issue for 2020 to our point of view.
Which is your preferred area and why; between US government, municipal, investment grade or sub-investment grade debt?
High yield debts are still ofering come carry while the other segments are not attractive in our view. The stabilization in the economic outlook should support high yield with a limited tension on rirsk free rate and quite stable spread for credit.
Do you expect launches of new US asset-related funds to continue, eg, new ETFs or new actively managed funds?
ETF are clearly more and more popular and the trend towards more passive (in relative terms should continue in the short term.
Are you re-assessing your US/North America exposure? If so, why?
We have a viwe that the USD should depreciate in the coming year and that the potential of US equity is less attractive in international comparisons. Therefore we tend to recommend to reduce the US portion of our allocation. One way of doing it is to consider thematic investments (with a global coverage) at the expense of US stocks for example; moreover, we tend to diversify out of USD, i.e. diversify our currency allocation.
