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Global Equities - Key themes for 2020

Wild cards like Brexit and the U.S. election have the potential to impact markets against a backdrop of low inflation and muted growth.

The world will become ever-more disruptive

The pace of technological change seems to be increasing, helped by easier access to capital funding innovation. Disruption risk seems to have increased across many, if not all, sectors of the economy, and the speed at which disruptors are able to enter the market and challenge incumbents appears faster. Many reasons are contributing to this in our view, notably the easy access to information, helping drive creativity and therefore disruption. We believe that disruption risk is not only here to stay, but will actually happen more rapidly going forward. It is therefore critical for investors to have a structured systematic approach in assessing disruption risks facing a company or an industry. Some industries are particularly challenged - we would single out transport, energy and utilities as particularly at risk, but also the financial sector which is having to respond to leaner new entrant threats, and shifting customer expectations of how to be serviced. The technology sector is also constantly evolving, with leaders being challenged by new entrants all the time.

US elections will be the wild card

The US presidential could be tight, which will inevitably bring some focus on economic policies of the various candidates. This will have implications for share price volatility of specific sectors, notably the cyclical sectors, financials and healthcare. Clearly no one has any insights, but there are other considerations to be taken into account, such as the potential for the current administration to push for supportive economic measures and/or trade policies to engineer more economic support in the run up to the election, in order to win more of the electorate.

Brexit now a certainty, but shape of it still unclear, and therefore economic outlook remains uncertain

Brexit uncertainty remains high for investors and the economy, despite the strong majority secured by the Conservatives in Parliament. Whilst a strong majority means the Brexit process could be quicker to progress to completion and Brexit is likely to now be a certainty, the final shape of Brexit, and the all important details of the conditions of trade relationships between the EU and the UK remain unclear. The UK will also likely be entering into long protracted trade negotiations with many of the other countries/regions, making it a further source of uncertainty. The economic momentum might remain weak during this period, although this could be offset by the government’s intentions to stimulate the economy through infrastructure and healthcare spend. We will need to assess this once we have the details of the new policy initiatives. After the initial market euphoria from the news of a stronger majority, we believe many questions and therefore areas of uncertainty will surface around economic policies, trade agreements, monetary policy reaction, and not least political tensions around shape of the Union. This will be an important focal point throughout the entire of the year and beyond, with implications for both the UK and EU economic outlook.

Cyber security takes centre stage in corporates’ focus and spend

We foresee 2020 to be a year of further focus on cyber security (notably with the US elections potentially providing an important watch point for cyber security interference of sorts). We believe that corporates will continue to increase their spend on cyber security, given the increased importance it has on governance, reputational and stewardship risks. We foresee an increase in cyber attacks, which will further remind companies of the need to allocate a growing part of the information technology (IT) budget to this area.

Lack of inflationary pressure

We believe that there will be a limited uptick to inflationary pressures globally in 2020. Wage inflation is a key driver of inflationary pressures in developed markets, so we will need to monitor this trend carefully. In our view, there is a limited scope for a material pick up in wage inflation, given the strong underlying deflationary pressures coming from innovation and automation in particular, but also from the ongoing competitive pressures of emerging markets in a global world. Lacklustre global economic growth is also contributing to a sluggish inflation outlook. We believe this theme carries a risk of being persistent over many years.

China will not hard-land

We believe that China has enough policy levers to pull to ensure that its economy does not hard land. US-China trade tensions are here to stay and are arguably just one more visible part of the broader geopolitical dynamics at play between the two superpowers. We believe this will remain an important consideration in the years to come and therefore will be something that investors will need to take into account as part of the top-down risk assessments.

Central banks remain accommodative and data dependent

We believe that central banks will remain accommodative across the globe, and importantly data-dependent. This should provide support for the market, and importantly for equity investors, could dictate the style leadership in the markets, with the debate around growth versus value remaining relevant. Beyond the support that accommodative monetary policies will provide, there is a need to debate how low interest rates have become, how much lower they can go, and the repercussions of extended periods of negative rates, in terms of risky assets and savings intentions. Over and above that, there is the need to face the fact that inflationary pressures are low, and indeed underlying deflationary currents are strong.

Global Economic Growth remains steady at current levels

The global economic momentum will be somewhat dependent on the ongoing US-China trade tensions, with the outlook shifting somewhat, depending on whether trade tensions ease and both nations agree to a truce, or whether tensions flare up. At this stage, based on the current developments, we believe that economic growth could remain steady in 2020 at current levels. During 2020, we could have a re-emergence of the debate around recession risk increasing, given that we are in the latter stages of what has been a long economic cycle. Our view remains as per before ­- we should debate the shape of a recession rather than risk of a recession.

The pace of technological change seems to be increasing, helped by easier access to capital funding innovation. Disruption risk seems to have increased across many, if not all, sectors of the economy, and the speed at which disruptors are able to enter the market and challenge incumbents appears faster. Many reasons are contributing to this in our view, notably the easy access to information, helping drive creativity and therefore disruption. We believe that disruption risk is not only here to stay, but will actually happen more rapidly going forward. It is therefore critical for investors to have a structured systematic approach in assessing disruption risks facing a company or an industry. Some industries are particularly challenged – we would single out transport, energy and utilities as particularly at risk, but also the financial sector which is having to respond to leaner new entrant threats, and shifting customer expectations of how to be serviced. The technology sector is also constantly evolving, with leaders being challenged by new entrants all the time.

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 Definitions:

Growth refers to stocks of companies whose earnings are expected to grow at an above-average rate relative to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects.

Value refers to an investment approach that aims to select stocks that trade for less than their intrinsic values.

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Zehrid Osmani, Head of Global Long-Term Unconstrained, Martin Currie (a Legg Mason affiliate)

Zehrid is Head of the Global Long-Term Unconstrained team and is also co-manager of Martin Currie Global Portfolio Trust. He joined Martin Currie in May 2018 from BlackRock, where he held a number of senior roles from January 2008. At BlackRock, he was a senior portfolio manager and had responsibility for managing several pan-European equity funds with a specific focus on unconstrained, high-conviction, long-term portfolios, as well as being Head of European Equities Research. Prior to this, Zehrid managed equity portfolios at Scottish Widows Investment Partnership (SWIP), and was a specialist sector analyst at Commerzbank Securities, UBS Warburg and Credit Lyonnais. Zehrid began his investment career as a trainee fund manager at Scottish Investment Trust. He has a BA in Economics and Finance from University of Paris-Sorbonne and a Masters in International Finance from the University of Glasgow.

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