Fixed income returns have been excellent in 2019. Secular trends which have supported performance will remain in place – and indeed intensify – in the 2020s.
We view the Chinese economy as key to the global business cycle. Recently, Chinese leading indicators have improved. The credit impulse, for example, which measures the change in the flow of new credit to the private sector as a percentage of GDP, has turned positive. There is a correlation between the credit impulse and global business confidence, even if there are also other influences on the latter. Both the OECD Leading Indicator and PMIs have risen off their lows, too
While markets have become more optimistic recently, we expect the bounce in Chinese credit to be more muted than in 2012-13 and 2015-16. Ongoing corporate defaults suggest China stimulus will be both modest and ultimately ephemeral.
The overall picture for the European economy remains one of modest, though seemingly stabilizing, growth. Consumer spending is decent, but there are signs of slower momentum in the labor market. Weakness in manufacturing has already spilled over to the labor market and to services in Germany.
The US should benefit in the short term from a lift in sentiment in the aftermath of the headlines of the ‘Phase One’ US-China trade deal. Still, we see plenty of end-of-cycle characteristics, which pose downside risks to growth. Growth is predominantly driven by consumer spending. Business investment remains absent and CEO and CFO confidence surveys caution this could remain the case. Corporate profits are eroding as labor costs are on the rise and we see a growing risk that cost cutting could start to have an impact on the labor market. However, macroeconomic and market trends have been slow this cycle, so the pace of this process will probably fit that template.
The composition of the White House’s proposed December 2019 tariffs were self-damaging for US interests, as they would have hurt the US consumer ahead of an election year. So we should perhaps not be surprised by their recent repeal in the ‘Phase One’ deal. Yet for all the hoopla around the recent agreement, average economy-wide US-China tariff levels are still higher than the levels which so roiled markets in August 2019.
CEO and CFO confidence may well be linked to the challenge of making large long-term investment decisions amid such a fluid trade landscape. Their desire for stability will be hampered for most of 2020 by what looks to be a closer-than-usual White House contest. Uncertainty over who will win the November election may start to dominate markets from midyear. In the interim, we have the Democrat primaries in March. Who could go full steam ahead with corporate investment with both the geopolitical and domestic political windscreen so fogged up?
In the UK, the next election is now likely to be in 2024, following the convincing Conservative electoral win. This takes the rolling domestic uncertainty and parliamentary stasis of the last twelve months off the table. In terms of negotiating the future relationship between the UK and the EU, however, it is only the end of the beginning, to paraphrase Churchill. There is still scope for disagreement over the details and timing of trade agreements, and progress could be slowed by protectionist stances in front of specific domestic audiences and by insecurity in Brussels over large countries successfully leaving the EU. Still, we note that it took a hard deadline to concentrate minds – leading to compromise – in October 2019, so some tight deadlines are probably a harsh necessity in 2020.
The guidance from the Fed and ECB has been clear: both institutions prefer to remain on hold for the time being, and for both the bar to hike rates looks high. A pronounced rise in underlying inflation could spoil that outlook, but we expect core inflation in these economies to remain close to current levels.
Fixed income returns have been excellent in 2019, as they have for the last 3, 5 and 10 years. As yields have fallen and spreads tightened, the consensus view has consistently been to call time on the duration trade and look for higher yields.
But the consensus has missed the structural trends: the demand for duration-matching at pension funds and life insurers, the demand for income from an ageing society, and a need for capital stability in retirement. These secular trends will remain in place – and indeed intensify – in the 2020s.
With all that said, we do not expect the same total returns in 2020 as in 2019. That means a far more active approach is required – in curve, country and credit. We can identify areas that we like for 2020, but it is also important to choose areas on which to be cautious, following such strong total returns.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.