3. Biotech M&A Activity Likely To Continue: Biotech is on the mindsets of many investors heading into 2020 as M&A announcements were in the headlines throughout 2019. According to the Chimera Research Group, there were 28 biotech mergers & acquisitions announcements in 2019, including the recent announcement of Novartis’ planned acquisition of The Medicines Company. Margin compression, threats of drug price control and patent expirations, will challenge large pharmaceutical companies in the new year to find revenue replacement alternatives. One of these alternatives in 2020 will likely involve the acquisition of smaller capitalized biotech companies with innovative drugs nearing the final stages of FDA approval.
4. Preferreds Continue To Become A Preferred Source Of Income: Dependable distributions are important for income-oriented investors and preferred securities can help provide such distributions. Preferred securities, also commonly referred to as preferred stocks, represent a hybrid security type combining different features of both equities and debt. While most issuers of preferreds are banks, there are also other issuer types, including insurance companies, utilities, REITs, industrials and diversified financial services.
As a result, investors may want to continue using preferred securities as they did in 2019, while also considering the use of portfolios of preferred securities incorporating different types of issuers to help meet their income needs in 2020.
5. ESG-Based Strategies Gain More Prominence: Sustainable, responsible and impact investing is an investment theme growing in popularity across the globe. Strategies associated with this theme, which often incorporate environmental, social and governance (ESG) rating criteria, along with the investment merits of a given company’s stock, continue to attract more investment assets. According to the Forum for Sustainable and Responsible Investment, global assets under management in the strategy grew to $11.6 trillion in 2018 from $178 billion in 2005–a 6,417% increase! I anticipate the continuation of this trend in 2020, provided that the investment performance of these strategies remains strong on a relative basis.
6. Finding Value In Dividends: Dividends have long been a critical part of the total return investment equation for investors in common stocks. I tend to view companies that make regular dividend distributions and have a consistent track record of growing distributions over time in a more favorable light. In other words, I view such companies as possessing a higher degree of financial health. Moreover, stocks that pay dividends also tend to have characteristics favored by value over growth investment approaches. If the yield curve remains challenged in 2020 and stock market volatility returns during the second half of the year, look for consistent dividend payers and value-oriented investment strategies, which have taken a back seat to growth-oriented investment strategies over the last decade, to outperform.
7. International Equities Attract Investment Flows: Though many uncertainties remain for international economies and international markets in 2020, including Brexit (which now appears likely) and further trade agreement negotiations, the outlook for global economic growth has improved with J.P. Morgan forecasting 2020 global GDP growth of 2.5% vs. a 1.7% GDP growth forecast for the U.S. I anticipate emerging markets outperforming developed markets internationally in 2020, provided that Phase 2 trade talks between the U.S. and China do not take a wrong turn towards a new round of tariffs.
8. Strong Consumer Fuels Further Growth In E-Commerce: Evidence of the strength of the U.S. consumer can be found in sales data from the 2019 holiday shopping season. According to a CNBC article entitled, Record online sales give U.S. holiday shopping season a boost, overall holiday retail sales, excluding autos, increased by 3.4% when compared to 2018 with online sales leading the charge.
E-commerce sales made up 15% of total retail sales and rose 19% versus the prior year to a new record high according to MasterCard’s retail sales data from November 1–December 24, 2019. I anticipate further online commerce growth in 2020, which should benefit not only e-commerce companies but also companies that derive a significant amount of revenues from activities performed within the e-commerce ecosystem.
9. AI Implementations Increase Across Multiple Industries: Applications of artificial intelligence (AI) will continue to take place in 2020 across multiple industries ranging from finance to health care to automobiles, disrupting how many companies operate and, in certain cases, transforming the bottom lines of these companies. Also referred to as machine or deep learning, AI is typically associated with companies whose technologies are focused on the automation of cognitive processes such as speech recognition, deep learning and visual navigation. Another innovative technology that should also experience implementation growth in 2020 is cybersecurity, thanks in part to new regulations as well as the heightened risks of malware attacks, data breaches and hacking in general.
10. Counterbalancing Consensus With Contrarians: Whenever there is an overwhelming one-sided sentiment, whether positive or negative, among investors, and assets are flowing in the direction of that one-sided sentiment, it may be time to consider adopting some form of a contrarian approach. The same can be said for less favorable analyst consensus opinions on the stocks of certain companies that may otherwise appear healthy and positioned to grow. Coming off a year where seemingly everything worked, it may be worthwhile to consider investing in a stock portfolio of attractive companies that did not work in 2019 or that analyst consensus suggests will not work in 2020, despite strong fundamentals.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust UITs consistent with several of the portfolio management ideas for consideration cited above.