By Bilal Hafeez 20-12-2019

A Stock Picker’s Guide To 2020 (The BID)

(18 min listen)
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Summary (You can listen to the podcast by clicking here)

Tony DeSpirito, Managing Director and Director of Investments at BlackRock discusses his outlook for stocks in 2020.

• DeSpirito claims that equities have an image of being highly risky due to being measured against monthly volatility. In contrast, if volatility is observed from a longer time horizon (i.e 3+ years), they appear less so.

• He highlights that, given the current backdrop, stocks (S&P 500 – 1.9% dividend) generate higher income compared with bonds (1.7% yield on US 10 year). Additionally, if a more income-oriented index is considered like the Russel 100 value index (2.5% dividend yield), the income has a chance to double every 5 years, which is a significant return.

• DeSpitio believes a big data paradigm shift has changed the skills of PM’s from finding information to focusing on important information. He advocates maths as a particularly important skill in analysing large datasets.

• He further argues that the market has become hyper efficient in the short end (i.e., Algo trading) and is driven by short-termism (quick profit). This, in turn, presents an opportunity for long term investor to take advantage of time horizon arbitrage by following fundamentals.

• DeSpirito predicts that in the future a firm’s performance on the ESG metric will determine its cost of capital. A desirable ESG score will mean a lower cost of capital, and vice versa.

• He believes the Bull Run in Equities this year was a mere correction from last year’s policy error where the Fed was too hawkish. But he also admits that currently the economy is in the later stages of its cycle.

• Despite this, DeSpirito is bullish on the health sector (demand stemming from the aging population) and the banking sector (Strong Capital ratio vs 2008 GFC). He is bearish on income proxy stocks, i.e. utility and REITS, as they have been bid up in price (expensive valuation).

• Finally, he thinks the 2020 US election will make the equities market volatile.


Why does it matter? Tony’s advice is this: prudence is important in the later stages of an economic cycle. Invest in quality business models with persistent earning (free cash flows and net profit), cheaper valuation (low P/E, P/B, etc.), a strong balance sheet (not highly levered with strong liquidity), and those that are ESG friendly.

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