Bulls, bears and consensus trades

Welcome to 2020. The bulls still have strength in numbers, but an increasing number of bears are emerging from hibernation. Those who argue that benign market conditions will continue courtesy of central banks are up against those who believe markets aren’t pricing in any risk.

In the last of our Livewire Outlook Series videos, we called upon 9 fund managers to look into their crystal ball and give us their bull or bear thesis and to also nominate the consensus trade that they think could explode this year. The responses range from an 8% fall for the S&P/ASX 200 to a sell-off in growth stocks and central banks changing course (again) to raise rates. 

Access the video or transcript to learn more.

Note: This video was filmed on 17 December 2019.

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Edited transcript

Blake Henricks, Firetrail Investments 

• S&P/ASX 200 outlook for 2020: Bearish, -7%

I think you've got to be bearish. The whole reason the market was up 25% in 2019 was because the Fed cut rates, rates were low, assets went up. The two biggest tail risks were Brexit and trade wars, and they've both been solved. I think earnings probably grow, but the market probably goes down.

• Most crowded trade: Lower for longer interest rates

The biggest one is low for longer. I don't know what breaks it, but if you look back at history, it's very rare for a commodity or any kind of asset to go down and stay down forever. So we'll see some volatility. And I think there's a lot of people on the lower for longer side of the boat, and it won't take much to start to rock it a bit.

Andrew Mitchell, Ophir Asset Management

• S&P/ASX 200 outlook for 2020: Bullish, +5% to +15%

If you look at the macro backdrop, the central banks around the world have made a commitment to continue to put liquidity and pump up the markets as long as inflation stays low. So with that behind us, we think we can still get the earnings per share growth around 5%, you've got a dividend yield around 4%, so we're thinking somewhere between 5% and 15%, just to give that little room for error. With these low interest rates, we think you could even see a point higher in the multiple just because equities are cheap relative to fixed interest, where you're seeing negative real rates of return in some cases now.

• Most crowded trade: Low inflation

The big one, and it would be a big unraveling, is if inflation doesn't stay benign, i.e., we get a spike in inflation, interest rates go up. You could see the market really selling off growth stocks to buy value stocks, and that's what we're watching at the moment. Just that inflation figure.

Nikki Thomas, Alphinity Investment Management 

• S&P/ASX 200 outlook for 2020: Bullish

I'm always a bull, but I think you need to put some context around that. If you start the year on 1 January, global markets are up over 23%. If you start the year on 1 October, it's up 6%. So actually markets have been very strong, but after a very difficult fourth quarter. I think you're not going to see monetary policy turn the other way. You're possibly going to see more fiscal stimulus and interest rates staying low. Equities are a great place to be.

• Most crowded trade: Boeing 737 MAX returning to service

Oh, I think everybody believes interest rates are going to stay low. I actually don't think that's necessarily wrong. I think everybody thinks Trump's probably going to get to power. Not necessarily wrong. Where would they be wrong? There's been a firm consensus that the Boeing 737 MAX would come back into service sometime in 2020, and that's looking increasingly unlikely. So I wouldn't be long Boeing right now.

Rachel Cole, NAOS Asset Management 

• S&P/ASX 200 outlook for 2020: Bullish, +8%

The market's had a really stellar run in 2019. I think that's probably been more about multiple expansion rather than earnings growth. So I think at some point, that disjoint will have to rebase. But looking into next year, I think we're still in a low growth environment and rates will continue to compress. So I think we'll still probably get growth this year, but it'll be a lot more moderate than what we are seeing.

• Most crowded trade: Growth stocks

Well it hasn't hurt yet, but I think long growth has definitely been a crowded trade, which has actually worked. But as I said around the market, I think it's been mostly around a multiple expansion. So at some point its worth watching out.

David Allingham, Eley Griffiths 

• S&P/ASX 200 outlook for 2020: Bullish

We're bullish. It feels full sort of foolish saying we're bullish given the movement we've had in 2019. But I think the old saying "don't fight the Fed" applies. We've got the three largest central banks in the world all expanding their balance sheets in a coordinated fashion; a $100 billion a month between them all. Bank of Japan, ECB, the Fed, look, you wouldn't want to stay in front of that liquidity wall. They want to get volatility down. They want to flatten the risk curve, so we're seeing cash rates decline and we're seeing bond yields decline.

• Most crowded trade: Low inflation

I can't think of a genuine consensus trade within equities. I think it's actually quite hard. I would've said it was momentum and tech three months ago, but those stocks are well off their highs. I would have said it was gold, but that's come right back. So I think it goes back to inflation. I think inflation is the big macro trade at the moment. The consensus is inflation's never coming back. I think that's a risk when you look at the oil price; it's looking like it wants to break out. Copper's ticking up, you've got economic surprises and US indices are on the rise. You look at average hourly earnings, a tight labour market, there's a bit of inflation risk in the system over the next couple of years and that's clearly not a consensus trade.

Ben Clark, TMS Capital

• S&P/ASX 200 outlook for 2020: Bullish

I'm a bull as well. I'm a bit more cautious than I was this time last year, just because of where valuations have got to now. I think you'll see very little volatility this year, and I think you'll get a bit more of that next year, but I think this low-rate environment continues to pour money into the market. And it's good for price momentum as well.

• Most crowded trade: Lower for longer interest rates

I think the biggest one has got to be the lower rates for longer story. I mean I've just quoted it, I think it's probably right for now, but everything has been priced off that mantra and if you did see a kick-up inflation or anything like that around the world, everyone's positioned one way.

Matthew Kidman, Centennial Asset Management

• S&P/ASX 200 outlook for 2020: Bearish, -5% to -6%

I'm going to stay on the bearish side. I think unlike last year at this time, when we were headed in with prices that adjusted down, we've come into this year with a lot of momentum and it probably means the first period in 2020 looks quite good. But we're not going to get any more assistance from the Fed. In an election year, they're not going to raise rates, but the multiple expansion probably leads in the first half of the year, and then it tails off I think, and maybe earnings aren't quite as good in the U.S. and elsewhere in the world in a slow growth environment.

• Most crowded trade: Low volatility

I think consensus trade is the lack of volatility. We've come out of a couple of things with the China-U.S. trade situation which seems for the moment to be tucked into bed. We've had what we believe now the UK election and Brexit solved. I don't know whether it is, but that's what the market's thinking. And the Fed basically said, we're not going to interfere in the next 12 months. So everyone is perceiving the macro risk is gone, which is a dangerous sign. Volatility is very low, especially since about October. And I think the volatility could actually rear its head for reasons we can't see yet. So just be in for a rocky ride, especially as we get beyond the first quarter of 2020.

Vihari Ross, Magellan Financial Group 

• S&P/ASX 200 outlook for 2020: Agnostic

Well, you know what, Vishal? Markets are so unpredictable over the short term. As Benjamin Graham said, "The market's a voting machine in the short term." Frankly your guess is as good as mine.

• Most crowded trade: Lower for longer interest rates

For us, the consensus view is very much lower interest rates for longer. The market's reached fresh highs in 2019, off the back of that tailwind. And it's really raised valuations across the board. For us, that means the risk is really around rates going higher from here. So the risk of inflation blowing out in the U.S. or a positive growth surprise with a U.S. and China trade war resolving as well. That we would see as the biggest risk really to countervailing that consensus view.

Josh Clark, QVG Capital

• S&P/ASX 200 outlook for 2020: Bullish, +5% to +10%

I think markets go higher in 2020. If you look at where rates are relative to the market, the market's still trading at a discount relative to its historic relative valuation. So I think that's supportive. Also, it looks like we're getting a positive outcome with regards to Brexit and also Trump's election towards the end of 2020, which probably means he's more incentivised to do a deal. So I think markets go higher.

• Most crowded trade: Expensive defensives

I think the big consensus trade is expensive defensives, so I think about where the supermarkets have gotten to that sort of thing, and that's largely a rate-driven view or explanation as well. So investors that have previously looked for defensive, smooth return profiles can't get them in fixed income anymore. So they've shifted into the equity markets, as I mentioned, moved into defensives like supermarkets, infrastructure, toll roads, airports. Does it unwind? I think towards the latter half of the year, as we potentially get more expectation built into rising rates then, I think it does unwind.