Economic trends could bode well for investors in both equities and fixed income, said Transamerica in its 2020 “Where We Stand” report issued Monday.
Economic growth in the United States will be about 2%, with lower interest rates and little inflation, rising corporate earnings growth, reasonable stock valuations and solid fundamentals in the credit markets, which should create an investor-friendly environment, Transamerica said in the report.
While 2% growth is predicted, “expectations, for the most part, remain somewhat skeptical that this level can be achieved. So we have a relatively low bar and angst that it can be reached, this is precisely the sentiment that breeds opportunity,” said Thomas R. Wald, chief investment officer of Transamerica Asset Management and the author of the report.
“We believe a confluence of positive characteristics could come together in aggregate to drive markets higher,” the report continued. “The largest uncertainties are the upcoming November elections, geopolitical events and the follow through on the recently improving U.S.-China trade relations.”
Trends favoring the predicted growth, which will be favorable to both equity and credit markets, include job growth, low unemployment and rising wages that should continue to drive consumer spending. “Perhaps none of these in and of themselves are a game changer, but in aggregate they are a good mix for those with fully invested portfolios and those with cash on the sidelines,” Transamerica said.
Certain conditions have to be met to achieve the 2% growth rate, the report added, including continued progress on U.S. and China trade relations; an alignment of consumer and corporate spending trends; reaching a bottom in the manufacturing sector; and continued strength in the labor market, according to the report. As far as relations with China are concerned, many investors and consumers may have hoped for more, but “the movement in the Phase One agreement could very well be enough to encourage U.S. companies to increase capital spending and investment closer to pre-trade dispute levels, which could prove meaningful to the overall economy,” Transamerica said.
Regarding the market, the report said U.S. equities could see continued double-digit returns this year. As such, Transamerica likes stocks over bonds. Overseas equities in both developed and emerging markets should also do well.
“With the Federal Reserve Board likely on the sidelines for most, if not all, of the year ahead, we believe bond investors should stay short on the curve while maintaining below-benchmark durations," Transamerica said. "We see the yield curve continuing to steepen and therefore do not believe investors at the long end will be sufficiently compensated for the interest rate risk they are incurring,”
The report noted that credit-based, fixed-income investors should probably expect coupon-like returns in the high-yield and investment-grade markets, and that investors should lean toward higher-quality segments of both markets.