Designing a Winner Portfolio for 2020

The year 2020 begins and investors and traders are designing the best asset allocation for their portfolios. And they ask ourselves the usual questions: how will this year comes and what surprises will it bring? What will be the performance of the global economy, today in deceleration with central banks resorting to declines in i-rate and debt issuance? Will the anticipated recession, due to inversion of the yield curve since 2018, finally will occur or seems the US its avoiding it? Will its manufacturing indices fall further and will consumption continue to be the mainstay of its economy? Will the impressive growth of the US exchanges continue or the correction finally come after 10 years of an incredible bullish rally? Will there really be a "Phase 2" in the Trade War? And the Brexit? Many questions and the experts are divided. Whatever the new year has in store, you've got options for investing in 2020 that promise a positive return.

This 2020 I will look for defensive or safer investments, especially in the second half of the year when US elections come giving much volatility in the markets. As usual, I prepare my long-term asset allocation diversifying through ETFs, the easy and cheapest way to create a portfolio. It isn't a completely passive investment: each month I review and filter each asset through basic fundamental and technical analysis, and hold or sell any of them, to avoid drawdowns. That´s a "dynamic asset allocation", in which rebalancing the portfolio monthly is the key. Let show my ten favorite investments for this year:

1. SP500 and Nasdaq

As being the best way to invest in the market top companies of every industry and biggest tech stocks, these ETFs are mandatory in every long-term portfolio. Both, SPY and QQQ, are the less-risky way to diversify in the stock market, and never lose a bullish rally as the current, that seems to never end.

2. Defensive Sectors

I'm looking this year to defensive sectors, mainly Healthcare XLV and Consumer Staples XLP. Both gain in 2019 (as all the GICS sectors), 18% and 24% respectively.  The advantage of an industry fund as these is that it allows the investor to select an industry to invest in, rather than a specific company. However, this kind of narrow exposure to one industry means that a negative development may hurt all the companies in the industry, lessening the benefits of diversification.

Into Healthcare review the Biotech sector XBI, as M&A (merger & acquisitions) in this subsector increases in 2019.  In Staples, I bet in Food and Beverages PBJ as a winner for 2020.

3. Corporate Bonds 

As a rule of thumb, investors design their investment portfolios with stocks and bonds in a traditional 60/40 model. With the stock market now overvalued (a current SP500 PE ratio of 24.64, one of the higher of the decade), it is a good idea to put some money on corporate bonds in 2020, which also works as a hedge if stock market corrects. Like 2019, my favorites are the high-yield or junk bonds, followed by the ETF HYG and the safer investment-grade bonds followed by the ETF LQD. Both did well last year, and a good idea for investors is to shift between the two of them depending on market behavior: optimistic (HYG) or pessimistic (LQD) sentiment.

4. Dividend Stocks

Are less-risk than growth stocks or non-dividend stocks. As usual, better choose companies with a dividend solid-history instead of those who bring higher yields. The Dividend Aristocrats NOBL is a good option: are SP500 index constituents that have increased their dividend payouts for 25 consecutive years or more. A good practice is to reinvest your dividends for better returns.

5. REITs

The Real Estate Investment Trust is a good passive income (or cash flow) for investors who are looking for an easy way to own real estate without managing it. The REIT companies do that job, and generally don’t pay taxes as long as they pass along most of their income as dividends to their shareholders.  Best look for traded REITs, as the popular Vanguard REIT Index VNQ, with great returns in 2018 and 2019, and good perspective this year due to low interests in the sector and acceptable Sharpe Ratio of 0.59.

6. Gold

A dovish Fed, as the current with Powell as chief, means that we should not expect i-rate hikes, and even more with recent CPI data showing declining inflation. So, it's very likely that the dollar will weaken or keep flat during the year. Given its inverse relationship with the dollar, gold, followed by the ETF GLD, could have a good 2020. It seems very basic, but that relation always works. Another reason is the US elections: investors usually take refugee in this commodity. Gold has currently reached a maximum of 7 years due to tensions in the Middle East, which says of its current strength.

7. China

The Large-Cap Chinese stocks, followed by the ETF FXI, are still near 18% from 2018 highs, due to the slowest pace in its economy, for the first time in three decades. Its shares have a 2-year gap that can fill, as the outlook is gradually improving between the US and Chinese governments with the sign of a "Phase One" that could launch fresh stimulus plans. And if China's economy moves up, emerging markets do the same.

8. Emerging Markets

While the SP500 (through its ETF SPY) has run over 182% in the last ten years, the Emerging Markets ETF EEM only climbed 4%. in the same timeframe. It's clearly cheap and a great room for growth. Factors like the probable Trade War end will generate that China again strengthen its economy due to injecting a lot of liquidity into the system, that's will be crucial. Investors are flowing more money now in emerging markets since 4Q 2019, a good signal.

9. Banks

Probably the peak sub-sector for 2020. Financial stocks and especially banks, followed by the ETF KBE, have been historically winners during periods of market rotation from growth to value. and, as financial sector XLF represents near 25% of the Russell 1000 Value Benchmark, it seems a good play for this year. Banks did great in 2019 (near 27% gain), despite three Fed' rate cuts, and I believe this good performance could continue this year. With yields rising on later-dated debt, banks could take advantage of the core of its business, the spread between loans and deposits, generating great profits.
With the yield curve is finally seems normalizing again, the US economy is looking like it might be able to avoid a recession. All of these are very bullish signs for bank stocks.

10. Value Stocks

Another good opportunity for investors in 2020 seems is in value stocks. Over the last five years, growth stocks, follow by IVW the SP500 growth ETF, have gained more than 70%, while IVE, the SP500 value ETF increased by 41%. Value stocks lagged growth stocks throughout almost the entirety of the 2010s, but that dynamic started to shift a bit in the second half of 2019, as I post in this September article. Usual ignore by fund managers, now value stocks are cheap as the gap between value and growth stocks is large in the last 15 years and could take advantage of the next value cycle in the U.S.

Check the chart below from is the US approaching a value cycle? According to Bank Of America says the US economy has been in "phase four" (downturn/recession) of its macroeconomic cycle for about eight months, and it is typically good for high-quality, low-risk and large-sized stocks. Phase one of the cycle is the “recovery/early cycle,” which is typically good for value, small-sized and high-risk stocks.