Another Vintage Year Ahead for Stock Markets?

Steve Clayton - Fund Manager

6 January 2020

Another vintage year ahead for stock markets?

2019 has been a vintage year for investors. It’s a far cry from the doom and gloom of late 2018. So what happened, and where will we head next?

First of all, there’s been a decisive shift in sentiment as to the course of global interest rates. Step back a year or so and many were worried they could head higher, especially in the US. Today almost nobody believes this, not least because the US Federal Reserve has said that it does not expect to change interest rates throughout 2020.

The bitter trade war between the USA, China and anyone else President Trump met has thawed considerably, with major progress seeming to have been made toward rolling back tariffs and raising market access for US producers.

In the UK, the election result returned a government that was not dependent on other parties, nor unable to agree amongst itself. Markets heaved a sigh of relief that the radical agenda of Jeremy Corbyn’s Labour Party manifesto was decisively rejected at the ballot box.

Brexit seems certain to happen, even if its shape remains to be defined, but with the market’s reaction to the election result, investors have made it clear that they had feared a Labour-led administration more than anything that Boris Johnson may, or may not bring back from Brussels.

So we enter 2020 with a background of improving global trading conditions, greater political clarity at home, and an expectation that cheap money will remain on the table throughout. That’s a big improvement from where we were. It’s not all roses though; Europe’s economy is being hurt by weakness in German manufacturing, and back home, surveys suggest that business and commerce pulled their horns in ahead of the election. Russia remains an unpredictable agent and the Middle East perhaps even more so.

How are the HL Select funds positioned?

For the HL Select funds we try to think about what is permanent and what is transitory. Every industry we look at is becoming more digital. Utilities are using telemetry to send data remotely from the field back to head office, minimising maintenance expense. The construction and manufacturing sectors are embracing digitisation at every stage from design through to production control. The capture, analysis and interpretation of data is revolutionising every sector of the economy.

This is not a fad, it is a new permanence. Industries are being rebuilt by a digital revolution that will neither pause nor falter. One of the most important tasks for investors is surely to make sure they are not holding the businesses that are being left behind!

When the HL Select team build our portfolios, we put the growing importance of the digital economy centre-stage in how we think about the future. We seek out companies that are leading the way in enabling digital change or applying it to their industries better than their rivals.

Take the staid world of life assurance policy administration (wake up at the back!). Our HL Select UK Income Shares fund holds Phoenix Group, because they have built a digital policy administration platform that allows them to service policies at exceptionally low costs, raising the group’s profit potential. Which has allowed the group to offer investors a strong dividend yield, although please remember that dividends are variable and not guaranteed.

The HL Select UK Growth Shares fund holds a significant position in GB Group, which provides the digital services to banks and ecommerce operators that allow them to accurately identify their customers and verify their locations. That has driven strong underlying growth, boosted further by a deft series of acquisitions.

HL Select Global Growth Shares owns positions in some of the world’s leading technology businesses, with an emphasis on companies active in providing cloud computing services, from Microsoft to Google, Amazon to Adobe.

Where will UK and world markets be in a year’s time?

By and large, the outlook is promising. Cassandras predicting market falls always bewail the state of the world and today they point to high debt levels. But debts are easily serviced when rates are rock bottom. So we doubt 2020 will be Cassandra’s year, unless we see interest rates march unexpectedly higher.

Unemployment is low on both sides of the pond and if trade wars continue to de-escalate, employers will be more likely to have the confidence to hire. The Chinese economy is harder to call. Recent weakness is likely trade-related, so could well reverse if progress in negotiations is sustained.

Above all else, markets will benefit from the very low levels of interest rates and government bond yields. Recent years have seen the emergence of negative yields on higher quality government bonds. Investors are effectively paying governments to look after cash. Whilst this carries on, I expect that the search for yield and the demand for reliable growth will remain intense. That should continue to push monies toward stock markets around the world.

What is the HL Select Fund Range?

The HL Select philosophy of investing in high quality companies, capable of creating a virtuous circle of growth, cash flow and reinvestment as they exploit the digital economy, is designed to capture the opportunities of today’s fast evolving world.

The HL Select Funds aim to give a different type of investor experience. Offering three concentrated portfolios of high quality companies, chosen and managed by our experts.

We hold around 30–40 stocks in each fund, so each one can make a real difference to returns, though it is a higher-risk approach. And we are free to invest in large, medium or higher-risk smaller companies to find those we believe have the most potential.

We also show every significant holding in the funds, explain why they’re held and provide regular updates on what's happening in the funds. Remember, like all investments the funds can fall as well as rise in value, so investors could get back less than they put in.

Find out more about the HL Select fund range 

HL SELECT UK GROWTH SHARES KEY INVESTOR INFORMATION

HL SELECT GLOBAL GROWTH SHARES KEY INVESTOR INFORMATION

HL SELECT UK INCOME SHARES KEY INVESTOR INFORMATION