Investing in 2020: More volatility and unexpected opportunities

Wondering where to put your money in 2020? Investments expert Rudi Filapek-Vandyck shares his insights on market trends and the potential for positive returns.

Never underestimate the propensity of financial markets to surprise.

Take the last couple of years as an example. By the end of calendar 2018, many investors were left licking their wounds, and few understood exactly why – but subsequent returns proved the best since 2009.

However, by the end of December 2019, a rather rare phenomenon revealed itself: the complete absence of a Santa rally for Australian equities.

In my observation, many a commentator prefers a cautious tone at the start of the 2020s decade. This is predominantly because 2019 was surprisingly rewarding. Every single asset beat inflation over the year. For the Australian share market, valuations, in general, are above historical averages while earnings growth remains low, negative or absent.

All else remaining equal, these are factors that should temper investors' expectations. But it doesn't automatically imply that 2020 cannot be simply another year of positive return – dividends included.

If we combine the market's performance over the past two years – negative in 2018 and subsequently well above average in 2019 – we find the overall returns were still above average, but not excessively so. On a 10-year view, the average per annum return throughout the decade past (at below 9%) is notably lower than for previous decades.

If recent weeks can be taken as a guide, investors should expect more volatility this year. This might imply the occasional period of elevated anxiety. There might be unexpected opportunities as a result as well.

Entering 2020, many a professional asset manager is positioned for a recovery in global growth momentum and better corporate earnings.

This benefits cyclical stocks (like BHP, Evolution Mining and Orica), financials (including the banks) and laggards in the share market: those cheap looking non-performers that might finally attract investors' attention.

But what if global debt, financial repression by central bankers and continued geopolitical tension are writing a different scenario?

I remain sceptical, but with the acknowledgement that sometimes small changes can facilitate a big impact in financial markets.

One of the key factors, potentially, will be the direction of the US dollar in the year ahead. Many are forecasting a weaker greenback.

If this materialises, it automatically opens the door to rallies for base metals, gold, emerging markets and fringe currencies. It would also translate into an exogenous headwind for many of the better performers in the local share market, including healthcare and technology stocks.

Locally, the RBA is still expected to further lower the cash rate. I don't think we should be talking rate hikes anytime soon. In equal fashion: forget about inflation. I mean, real inflation.

In terms of individual stocks, I am awaiting the outcome of the February reporting season – soon to be upon us.

Historically, local reporting seasons can set new trends or extend them, and this applies both to the share market in general and to individual companies. But as the August season has proved in both 2018 and last year, there's always the superpower on the macro-level to (potentially) overwrite whatever happens at the company-level.

Investors probably don't like to hear this, but even without the impact from bushfires, the outlook for the Australian economy, and for corporate profits, already looked a lot less promising than for many regions offshore.

The Australian share market might find it difficult to keep pace with international markets this year. This, in particular, applies if the RBA were unable to contain the Aussie dollar.

Just about everyone is now convinced the price for iron ore must head lower, at some point.

Among individual stocks, I am particularly interested to find out whether Amcor (AMC) can put in a better year, while equally keeping a watchful eye on Bapcor (BAP), NextDC (NXT), Nearmap (NEA) and various others. Each of these stocks are held in the FNArena All-Weather Model Portfolio and it is my personal view that share prices should be higher than where they are.

Ultimately, of course, the proof will be in each company's ability to perform and hopefully, the February reporting season can shed some light on this.

I remain heavily engaged with the limited selection of High Quality companies that trade on the ASX, such as Macquarie (MQG), CSL (CSL), REA Group (REA) and TechnologyOne (TNE), and remain confident in each company's ongoing long-term growth trajectory.

Rudi Filapek-Vandyck has been in journalism for over three decades, with more than half of it in finance. After publishing his own journals and magazines, he successfully built up an electronic financial news service in the Netherlands between 1995-2000. In 2002, Rudi founded FNArena in Australia, where he has developed various unique features and tools that help investors conduct their own market research.

Rudi's market observations and analyses are regularly picked up and re-published by other media such as The Australian, Livewire Markets and First Links. He has appeared on Sky Business and Your Money, and occasionally travels to present his analyses to investors by invitation from the Australian Investors Association (AIA), the Australian Technical Analysts Association (ATAA), the Australian Shareholders Association (ASA) and others. He is also the author of two books: Change, investing in a low growth world and Who's Afraid of the Big Bad Bear?

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.

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