Where's the risk? U.S. fund managers bet on bull run in 2020

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By David Randall

NEW YORK (Reuters) – With the UK election results giving some certainty to the Brexit process, a U.S.-China trade deal all but signed and the Federal Reserve signaling that it will stand steady for the foreseeable future, there are three fewer hurdles standing in the way of global equities extending their record run into 2020.

Yet fund managers say that lingering issues on trade and the U.S. elections in November could still weigh on returns in 2020, leaving long-shunned U.S. value stocks and international equities primed to outperform in the year ahead.

“You’re going into an environment where there’s a lot of good news already priced into the market, so if there’s any derailing of any positive items, there’s not a lot of give,” said Elliot Savage, portfolio manager of the YCG Enhanced Fund, which is up nearly 40% for the year to date. By focusing on unloved areas of the market such as financials, “You have a chance to pick up companies with significant pricing power that you can hold for a long time,” he said.

A rally in value stocks would be a boon to investors who have waited in vain during this record-setting bull market for more cyclical areas like energy and financials to outperform.

The benchmark S&P 500 () hit another record on Tuesday as investors moved out of the perceived safety of bonds, continuing a rally that has boosted it nearly 28% for the year to date.


The dialing down of risks hanging over the market could lead to it to become overheated, warned Charles Lemonides, portfolio manager of hedge fund ValueWorks LLC.

“You may get some optimism in the markets where you will see buying that is valuation non-specific and you’ll get a momentum trade come back into market,” he said.

Lemonides is focusing more closely on valuations and has been buying energy names like Tidewater Inc (N:) and biotechs like Gilead Sciences Inc (O:).

“Biotechs across the board are so attractively priced given their fundamentals,” he said.

At the same time, the increasing focus on Washington during a presidential election year could become a drain on investor sentiment, said Lemonides.

“Presidential elections freeze investors on both sides of the political spectrum,” he said. “The fundamental conditions of the market are really good but there will be a headwind from the election.”

A decline in the U.S. equity market could offer an opportunity to add to small caps, which have underperformed the broader market, said Steve Chiavarone, a portfolio manager of the Federated Global Allocation Fund.

“The market has run up so quickly that we may get a sharp pullback purely on technical reasons, but we still think that there’s going to be a catch-up trade in areas that haven’t had the same run,” he said.


The apparent resolution of Brexit will likely prompt more investor interest in European stocks, while trade issues will continue to weigh on investor sentiment for China, said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.

“The investors we spoke with viewed the UK election as a major step toward resolution of Brexit, but didn’t see the developments in the U.S.-China trade war as having the same significance,” she said.

The Conservative majority in Parliament is widely expected to pass the Brexit Withdrawal Agreement before the current deadline of Jan. 31. At the same time, the “Phase one” pact between the United States and China focuses on reducing U.S. tariffs on Chinese goods in exchange for increased Chinese purchases of U.S. agricultural, manufactured and energy products over the next two years.

“Although we’re seeing tamed-back rhetoric, we believe that we’re still far away from an ultimate trade deal that will put this behind us. Maybe we’ve just tackled the easy-to-solve problems,” said Brian Kersmanc, deputy portfolio manager for GQG Partners’ International Equity strategy.

Kersmanc has been moving more of his portfolio into European stocks such as London Stock Exchange Group PLC (L:) and French aerospace company Safran SA (PA:). He is also looking into European value sectors such as industrial stocks and energy, both of which have been weighed down by concerns about the strength of the European economy.

“There’s some really interesting opportunities in companies that no one wanted to touch,” he said. “Now that the market sees a Brexit resolution happening, you’re going to see stocks coming off a severe discount.”

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