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These Stock Groups Can Carry You Through A Volatile 2020, Says Top Investor

Investors are starting to get 2020 vision.

Stocks have performed strongly heading into the new year, maintaining their notable year-to-date gains despite starting December on a downbeat note. The S&P 500 is up over 24% for 2019 as of Thursday’s close, on pace for its best annual performance since 2013.

Now, buyers are shifting their attention to the pivotal year ahead, one that will likely see a heated race for the White House along with potential developments in the U.S.-China trade dispute that has been weighing on markets for the better part of two years.

Dave Donabedian, chief investment officer for CIBC Private Wealth Management, said Wall Street is likely to get “a continuation” of the not-too-strong, not-too-weak macroeconomic backdrop that has paved the way for stocks to climb for much of 2019.

Between “mediocre economic growth, low inflation, low interest rates [and] easy money from global central banks,” much of next year’s setup will be similar to this year’s — with a few exceptions, Donabedian said Thursday on CNBC’s “Trading Nation.” 

“The one thing I think will be different, and a positive, is I think we’ll see some earnings growth next year whereas we’re really not seeing any in 2019,” Donabedian said. “So, we do think there’s upside for the market next year. We think the bull market will a year from now ... still be in a bull market, although we don’t expect nearly the sort of gains for the S&P certainly that we’re seeing this year.”

Donabedian, whose firm handles approximately $59 billion in assets, said he is targeting a 6-8% total return for the S&P in 2020 based on what he expects to be 5% growth in operating earnings.

“We don’t see a lot of room for multiple expansion,” he said, adding that equity price increases will “have to be driven by earnings.”

“The consensus estimates are for 9 or 10% operating earnings growth. We think that’s too high,” Donabedian said. “Those estimates are already coming down. We think they’ll settle in probably in the 5 to 7% range, looking at some decent revenue growth and a little bit of productivity on top of that. But that earnings growth is really a necessary component if we’re going to continue to see the bull market extend through 2020.”

While Donabedian also expects volatility to rise in 2020 as the presidential election draws near, he suggested that investors should use the swings as opportunities to buy stocks “on the cheap.”

Of particular interest to the investment chief were certain parts of the technology, financial and ex-U.S. stock groups that he said provided good ways to sidestep volatility in the next year.

“Technology generally continues to look attractive and we are overweight in that area simply because you have more secular growth coming out of key parts of the technology space” like software, Donabedian said.

“You find a lot of recurring revenue models, the ability to grow globally, lots of free cash flow generation, so, we still find a lot of good ideas in the technology space,” he added. “One that’s a little bit different would be the financials, the banks in particular. ... You have banks trading at about a 60% value relative to the overall market, which is historically cheap, and you’ve got some improving trends. The yield curve has sort of un-inverted. Credit conditions are pretty good. Returns on capital for the good banks are quite solid. And they’re going to have the ability, I think, to continue those dividend increases in 2020.”

Donabedian also suggested that U.S. investors turn their attention overseas as certain world markets begin to reverse their long-lived downtrends.

“You have to literally span the globe and look for assets that may be undervalued,” he said. “It’s been pretty much a solid decade where, for a U.S. investor, it has made sense to stay home. But we are seeing some turns now.”

He noted that, overall, non-U.S. equities have gotten “historically cheap” from a valuation standpoint relative to their domestic counterparts, and now, there are drivers in place to help some non-U.S. stocks “close [the] pricing gap.”

“First of all, economic growth looks like it’s bottoming in key parts of the world, in Europe and Japan. Not that there’s going to be an economic boom, but recession avoidance seems much more likely now,” he said. “We’re also seeing signs of stabilization in growth in China. We also think that some of the geopolitical risks that have been out there at least are lessened. We do expect some resolution, or at least calming, of the trade issue, and, of course, for Europeans, the worst-case Brexit outcome looks like it’s probably not going to happen. And we also think the dollar will be less of a headwind than it’s been for U.S. investors, and it might even turn into a tailwind.”

Stocks ended Thursday practically flat after a day of choppy trading.