2019 turned out to be a bumper year for shares and bonds as the global economy did not slow as much as expected and central banks kept interest rates low. However, economic and political uncertainty weighed on the markets at different stages, and several issues remain unresolved.

What does 2020 hold in store for investors?

Starting at home, Brexit uncertainty should persist despite the substantial majority won by Boris Johnson at the general election. The UK will leave the EU on 31st January and enter a transition period until 31st December. The Prime Minister insists he can conclude a free trade deal in this relatively short window, but if he fails to agree terms with the EU the UK could still face a hard Brexit at the end of the year. Mr Johnson has also hinted that his preferred deal would protect the trade in goods rather than services which account for a significant share of UK economic growth. We believe the pound’s performance is the best indicator of what kind of outcome the markets expect- if the pound rises, a softer Brexit is thought more likely, but a fall would imply a harder Brexit.

Nonetheless, we favour UK shares. Brexit uncertainty put off many investors in 2019 and while they started to return after Mr Johnson won his ‘stonking majority’ in the election, we still think UK shares appear undervalued.

Another threat which should continue to hover over the markets in 2020 is trade tensions. The US and China seemed to make progress on the first phase of a trade deal at the end of 2019, but some of the most contentious issues have not been addressed. Meanwhile, tariffs- taxes on goods imported from abroad- will weigh on economic activity, and US President Donald Trump could turn his attention to other trading partners, like the EU.

How about the global economy?

An effect known as the inversion of the yield curve- where the yield (or the income) paid by short-term government bonds rose above the yield on their long-term equivalents- rattled the markets in 2019 because in the past it has tended to precede an economic slowdown. However, we do not believe a recession is imminent on this occasion as the curve reverted to its customary upward slope at the end of 2019 and other indicators, such as employment levels, remain strong.

While central banks seem set to keep interest rates low in 2020, the markets may also benefit from greater government spending. The Conservative party’s successful election campaign pledged to invest in the UK’s transport network, particularly in the north of England. Elsewhere, at the end of 2019 the EU unveiled its Green New Deal which aims to make the region’s economy more environmentally friendly, although there are questions about Germany’s commitment to the plan.

We expect the global economy to grow in 2020 at a slower than average pace but policy remains supportive to markets.

Can returns match 2019?

We doubt it, but they can still be positive.

US shares have led the financial markets over the last couple of years, propelled by President Trump’s tax cuts. Whether this trend continues in 2020 remains to be seen, as these kinds of populist policies are not sustainable. We think valuations in other regions look more attractive, for instance emerging markets which offer better growth prospects as long as the dollar does not strengthen against other currencies.

Investors will also closely monitor corporate earnings in 2020. They stagnated in 2019, and the ability of companies to boost profits could influence how shares perform.

Bonds may face a more challenging environment in 2020 with yields at historic lows, even negative in some countries, so we do not expect them to match the generous returns of the last few years. However, they provide valuable diversification within portfolios because investors revert to what are considered safe haven assets such as government bonds (as governments are less likely to default) during periods of uncertainty.

Our investment principles

As we enter the new decade, our key messages remain the same.

Firstly, do your holdings reflect your attitude to risk? A portfolio with a higher proportion of shares is more vulnerable to market fluctuations but offers potentially better returns in the long run. On the other hand, a portfolio with a larger allocation to bonds aims to deliver returns which are less sensitive to market turbulence.

Secondly, is your portfolio sufficiently diversified? Diversification means spreading your holdings across different types of investments and regions. That way, if one asset class underperforms, it should not disproportionately impact your returns.

And thirdly, do not let short-term distractions like Brexit uncertainty or trade tensions force you into knee jerk reactions when it comes to managing your portfolio. As the saying goes, time in the market is more important than timing the market.

Toni Meadows, Omnis Investments Chief Investment Officer

The value of your investments can fall as well as rise, and you may get back less than you invest.