A roundtable of investing experts share their best advice for 2020

Fortune's panelists see great opportunities for 2020. But they also see a changing of the guard among the stock market’s winners.
Photographed by Mackenzie Stroh for Fortune; Grooming by Nicola David
Photographed by Mackenzie Stroh for Fortune; Grooming
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Economists may be fretting about a 2020 recession; not so the panelists on our annual roundtable of investors. (Even the self-described “bear in the room” was fairly upbeat.) But our experts also characterized 2019—a year in which virtually every asset class registered big gains—as a weirdo anomaly. Next year, they say, investors will need to be pickier. Our panel was wary about the future of Big Tech stocks, and bullish about smaller tech, as well as health care—with or without Medicare for All. 

This year’s panel included Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management; Karina Funk, comanager with David Powell of the top-performing Brown Advisory Large-Cap Sustainable Growth investment strategy; Rob Sharps, head of investments and group chief investment officer at T. Rowe Price; and Angela Strange, general partner at Andreessen Horowitz. Here are edited excerpts from their discussion.

Fortune: We’re going on 11 years of a bull market in the U.S., but many investors have spent the past couple of years wondering when the other shoe is going to drop. We’ve had slowing GDP growth, we’ve had declining corporate earnings. Are we staring at something worse, like a recession? 

Josh Brown: I’m going to start by correcting you. We’re in a secular bull market that began in 2013. That’s the first time we made a new high since the 2007 crash, and that’s important because we don’t measure the 1982 to 2000 bull run from the lows of 1974. 

There’s also the cyclical bull that’s making new highs as we speak. In December 2018, we were down 20% in the S&P 500. So this is not quite as long of a bull as you might suspect if you just look at the starting point and the end point. [Pause] I’ll leave now, if you want.

No, please stay for the remaining 40 minutes! [Laughter] But you raise a good point: Is anybody here feeling defensive right now for reasons other than the age of the bull?

Savita Subramanian: Not to be the bear in the room, but there is this risk that a lot of the earnings we’ve seen over the last 10 years have been manufactured, by companies either buying back shares to pump up their EPS growth, or cost cutting. The next leg of this bull market has to be driven by a real economic recovery.

Josh Brown and Savita Subramanian.
Photographed by Mackenzie Stroh for Fortune

Karina Funk: I don’t foresee playing defense in a potential recession scenario. Some of the most compelling investment opportunities today are the companies that are solving customer problems, and frankly solving some of our thorniest social problems as well. In terms of access to better health care, whether it’s access to data in computation or whether it’s access to clean water, we’re not going to need any less of those things anytime soon.

Angela Strange: A lot of companies I’m investing in have got a seven- to 10-year view before they’ll even hit the public markets. But some of the best companies launch when the market dips. People start to look to save more money, they look for better services, and they’re apt to switch from incumbents. And so sometimes it is a better time to get started as a company.

Rob Sharps: Because we’ve had a record-long expansion, does it imply that we’re headed into a recession or that the bull market needs to be over? I would say no. We could have the global manufacturing sector begin to pick up. And could be in a period of time where we do resume earnings growth.

There are some sectors where price-to-earnings ratios have become very, very high, out of line with historical averages, and that’s another thing that makes some investors nervous.

Sharps: Yeah, I think the returns this year have been powered by technology, and you can say the same thing of really the entirety of this bull market. If you look this year at the performance of Apple, of Microsoft, that’s unlikely to be sustained. The valuations are more attractive for some of the big Internet companies. But there are risks around those right now from a policy and a potential regulatory perspective.

Brown: The elephant in the room is that every single asset class is up double digits this year. If we had had this meeting a year ago, when we were in that 20% decline, and if you had been asked, “What’s the outlook for 2019?,” would your answer have been, Yes, every asset class from gold to Treasuries, high-grade corporate bonds, high-yield, U.S. large-cap stocks, European stocks, Japanese stocks, emerging markets—all up? I think we’ll get dispersion of asset classes next year. It would be very unlikely to have two back-to-back years where literally every asset class works.

Subramanian: We’re starting to see some of these beaten-down, deep-value names outperform or come back to life. And what worries me about the S&P 500 in particular is that if we do see this value rotation, the companies that are going to outperform the market aren’t big enough to offset some of the companies that are going to underperform the market.

STO.1219. Picks Bar

Aspen Technology (AZPN)

Autodesk (ADSK)

Danaher (DHR)

Disney (DIS)

General Electric (GE)

Intuit (INTU)

MercadoLibre (MELI)

So it’s more of a stock picker’s market than an indexer’s market?

Funk: We’ve had a rising tide with many, many boats. I’m less concerned about valuation expansion when it’s coincident with business models actually getting stronger. And there’s a lot more to tech than the FAANGs. There’s the whole area of digital transformation and the move to the cloud. There are also industries that have underinvested in tech for decades.

Construction. Manufacturing. Infrastructure. So a company like Autodesk, with its building information management system, can help both in the design phase and the management phase, when the total cost of construction reveals itself. Or Aspen Technology: It helps really old industries—process industries, refineries, chemicals, some manufacturing—to optimize their unit operations.

Strange: I actually think the concept of a tech sector is somewhat outdated. Airbnb, is it a tech company? No, it’s a hospitality company.

Brown: Sure, and Amazon is a grocery store.

Strange: And other sectors are upgrading their tech. If we look at insurance, one in 10 companies in the Fortune 500 is an insurance company. Every single one of these was started before World War II. And they’re asking you 40 questions on a piece of paper to insure your house. That doesn’t make any sense.

Brown: Do you think the incumbents will digitize, or do you think they’ll be disrupted?

Strange: Both ways, both ways. Look at finance. Robinhood, they offer free stock trading, right? They’re up to 7 million users, which is a small piece of the pie. But then just recently Charles Schwab and TD Ameritrade cut their commissions down to zero.

Rob Sharps and Angela Strange.
Photographed by Mackenzie Stroh for Fortune

Brown: Do investors prosper, though? There was a massive market loss for publicly traded brokers. Robinhood does not trade publicly. I doubt very highly the stock would have been up on the news that Charles Schwab was not only cutting commissions to zero but also getting into fractional share ownership, which is something that Robinhood has done really, really well. 

Strange: There’s a tension between short-term and long-term. It’s this innovator’s dilemma. 

The goodwill that low commissions would build with a customer feels like a long-term investment. This is going to hurt my bottom line this year, but five years from now… 

Sharps: The market’s letting companies get away with that to some extent. Look at what happened with Disney when they went public with their streaming service investment. The earnings estimates over the course of the next several years went down, but the stock broke upwards. The market said, okay, they’re taking a much longer time horizon, and they’re trying to capitalize on it now.

Brown: We saw the same thing with Walmart. They announced the acquisition of Jet. It was such a ludicrous multiple. When that news came out, everyone said Walmart was crazy. The stock exploded higher and has not looked back. I don’t think they’re making any money on that. It’s not the point. The point is they are demonstrating to the Street and their investors that they want to be in the game this century.

Funk: Another company that had a race to zero is Intuit. Zero dollars for filing your taxes. You think that’s a race to the bottom. But it enabled QuickBooks Live, the ability to connect in real time with a live person to finish your taxes. 

Brown: Savita tracks investment strategy based on R&D …

Subramanian: We do. And what we found is the strongest driver of longer-term [performance] is R&D. That suggests that long-term growth is rewarded by investors and companies focused on not just how to navigate the next recession but how to navigate the next five to 10 years.

Strange: Some incumbents are realizing that they should pay up to get there faster. And sometimes the public markets are rewarding them. Prudential Financial just bought Assurance, a digital insurance broker that started three years ago, for $3 billion. Their stock went up.

One sector that has had a rough year is health care. Investors seem to really be terrified of the words Medicare for All.

Brown: Health care is the second cheapest sector in the market. But here’s what’s interesting. In this quarter, health care is, I think, the only sector that’s growing earnings year over year. So what a puzzle that is. It’s got to be politics keeping people out of these stocks.

To me this is the fattest pitch that exists right now: 74 million boomers in the United States, even more overseas. They will now spend the next 20 years trying to replace every body part they have [laughter] and living their best life literally until the last day, and that’s admirable, and I’ll be there soon—. 

Subramanian: We’ll be there with you!

Brown: I feel like they will weather whatever Elizabeth Warren or Bernie Sanders throws at them rhetorically. 

Sharps: There’s a tremendous amount of value there. It might be difficult for it to be realized next year, given all the political rhetoric that’s going to come out of the presidential campaign next year. But if you’re willing to look beyond that, there’s just tremendous returns to be had. 

Subramanian: Again, I’m going to be the bear in the room, but the other issue with health care is that we’ve seen leverage ratios reach the highest levels in history. It’s an M&A-intensive sector. But recently, they’ve been using debt rather than equity to finance deals.

Brown: Yeah, but isn’t it rational to use that cheap debt financing?

Funk: And consolidation makes some businesses stronger. Research labs, clinical labs, industrial labs, they want to buy from fewer vendors. The ones that are consolidating, like a Thermo Fisher Scientific or a Danaher, are grabbing more share of wallet.

Subramanian: It’s good to lock in the low cost of capital, but if your debt is floating, and you’re going to pay that increase in the cost of debt over the next couple of years, that’s where you worry a little.

I have to bring up the elephant in the room. As investors, does the unfolding of the impeachment story affect your outlook?

Sharps: No. I think it’s political theater. Unless there’s something that we’re not aware of that comes out as evidence in the proceedings, I wouldn’t change my perspective.

Brown: The Nixon impeachment was a buying opportunity. Its denouement—did I pronounce that right?—denouement coincided with the bottom of the ’74 bear market. And of course Clinton in 1998, if you sold that, you missed 18 of the best months of all time. So I would not play that game with my portfolio. Is that the denouement of that question?

The denouement was an anticlimax, and now I’m moving on. Our conversation has been very domestically focused. But are people seeing opportunities outside the States?

Brown: Well, it’s been a 50% outperformance for U.S. stocks versus international stocks in this cycle. So for the people who said you don’t need international, they look really smart. When are people going to get excited about European stocks trading at 12 times earnings? I don’t know when that will be because you would have thought it would happen at 14 times earnings. And it hasn’t. 

Sharps: The problem with looking at international broadly is that there are such deep structural problems in places like Europe and Japan. There are some good things going on in the Japanese market in terms of better corporate governance, better capital management, et cetera. But the underperforming sectors, financials and energy, are very dominant in European indexes. So I do think emerging markets is a good place to look.

Strange: Structural challenges in emerging markets actually present opportunities. Look at Latin America. Credit card penetration, it’s like 14% or 15%. But smartphone penetration is up to 80%.

So structurally, yes, we could wait for bank branches and credit cards to be established everywhere. But if everybody has got their smartphones, that’s how financial services are going to be provided. So clever companies are starting with small-dollar lending. They’re judging creditworthiness using data like, How up-to-date is your Android operating system? Do you charge your phone at night?

Brown: If you bought a Brazilian ETF 10 years ago, you have no return to show for it. But if you bought MercadoLibre, which is the payment processor slash e-commerce play of Brazil, you’re up, like, 1,000% and change. 

Karina Funk.
Photographed by Mackenzie Stroh for Fortune

Funk: It turns out it’s a really good business proposition to get 1.5, 1.8 billion under-banked people as customers.

As an ESG investor, I think in terms of companies playing offense rather than defense in markets like these. Some typical environmental, social, and governance analysis is defensive: Do you have a handle on labor relations? Do you have environmental liabilities? Are your physical operations insulated against the effects of climate change, and are you doing the same thing within your supply chain?

But you know what? Risk management isn’t enough to catapult a company into long-term sustainable growth. So the best companies are playing offense. They’re taking market share because they’re helping their customers become more efficient and more productive. They’re helping their customers save money. Saving money never goes out of style no matter where we are, in a peak or a trough.

Subramanian: We’ve been doing a lot of work on ESG. If you look at the balance sheet of the average S&P company, over 70% of assets are intangible. These are assets that you can’t analyze using traditional measures, and they are more tied to reputation, intellectual property, and metrics that aren’t necessarily what we learned about in business school.

So for example, think about a tech company: How happy its talent is is critical to the success of that corporation, because the biggest risk is brain drain and losing your smart people to a competitor. We found that the companies with the best employee satisfaction scores tend to have higher returns on equity than their peers with disgruntled staff.

Brown: I would be careful with that because a lot of the happiness is based on what the stock price is doing, and that could turn on a dime and almost be a coincident indicator. I’m sure there was a lot of Champagne being popped all summer long with WeWork. 

Subramanian: But one of the things we found is that employee satisfaction is actually a leading indicator of market performance.

Strange: And this workforce is very mission-driven. The answer to the question “Do I work for a company whose mission I really believe in?” is a very good sign of retention.

A final question for everyone: Where do you see the greatest risks and greatest opportunities in 2020?

Brown: I genuinely believe that most of the market is expecting some extreme move out of interest rates. They either think this whole thing is a fake-out and there’s going to be a bout of inflation, or that rates are headed to zero. But what if there’s just more of this as far as the eye can see? There have been 100-year spans where there wasn’t much volatility in interest rates. So it’s entirely possible that people with extreme opinions will lose and people that are doing asset allocation will win.

The biggest risk is you. You are your own biggest risk. Last year, we had a 16% drawdown in winter. We followed it up with a 20% rebound. How did you act? What did you do? Did you call your broker, “Get me out”? If you did, then recognize that you are the one doing the things that will have the bigger effect on your portfolio. It’s not the Fed, it’s not Trump, it’s you. The minute you get that through your head, you start becoming a better investor.

Funk: There are a lot of risks, whether it’s interest rates, geopolitical, trade wars, and there’s a whole lot out there that we can’t predict and we can’t control. Frankly, I worry about what I can control, which is going out there, doing the research, and finding great companies.

Health care has been a poor performer in the past 12 months. But some companies there are very, very strong. So tools, diagnostics companies that are helping with drug discovery, and the move to this trend from small molecule chemistry-based drugs to large molecule. There’s a lot more legs in digital transformation whether it’s transforming business-as-usual processes, moving that to the cloud, and just modernization. And then finally I’ll mention this trend of resource constraints. That’s not going away.

Sharps: There was a sentiment poll cited recently that had the fewest number of bulls in the history of the poll. But the opportunity for me is to lean away from safety and lean into cyclicality and unexpected earnings growth.

I like industrials in the U.S., names like Union Pacific or UPS where you can get double-digit returns. If you want to take on a little more risk, you could buy United Airlines or even GE. GE is messy right now. But they’re stabilizing the balance sheet, and you have a new CEO, with a proven track record, who can build on some strong underlying franchises.

In terms of risks I do think that there is an outcome from the election where political leadership implements some antibusiness policy that raises cost, that increases the regulatory burden, and ultimately will lead to a negative productivity shock. It could be particularly acute in sectors like financial services or energy.

Angela, what’s the greatest—

Strange: Not risk! [Laughter] I’m too positive. Venture capital! I think the biggest opportunity is to create companies that will serve the 50% of the U.S. and the more than 2 billion people worldwide that are under-banked or unbanked. I often state that the Amazon Web Services era is coming to financial services. What that means is, there are several different infrastructure companies that will partner with banks and package up the licensing process and some regulatory work, and all the different payment-type networks that you need. So if you want to start a financial company, instead of spending two years and millions of dollars in forming tons of partnerships, you can get all of that as a service and get going.

So what does that do? It will unleash all of these experiments, some of which will become large companies of the future.

Subramanian: Well, I’ll start with the risks. It feels like the market is getting more fragile, and what worries me about the S&P 500 and U.S. large-cap stocks, which are normally the most liquid stocks in the world, is that a larger percentage of these companies are owned by passive investors or by quant funds. So I worry that if there is some sort of mass exodus out of equities, the liquidity profile of the S&P 500 could look very different from what it has looked like in prior bear markets. 

For an opportunity, my favorite sector is U.S. financials. Financials to me looks like the new high-quality dividend yield sector. Little known fact: The share buybacks plus dividend yield of financials is the highest of all 11 sectors. These companies are putting cash back in the hands of investors. And leverage ratios are a shadow of what they were in 2007. The sector has transformed into a better hedge against a downturn than it was 10 years ago.

Thank you, Savita. And thanks to the whole panel. 

STO.1219. Picks Bar

Prudential Financial (PRU)

Thermo Fisher Scientific (TMO)

Union Pacific (UNP)

United Airlines (UAL)

United Parcel Service (UPS)

Walmart (WMT)

Three Things to Feel Excited About, and Three to Worry About, for 2020

Get excited about:

1. Health care: An aging global population means more demand for medical devices and tests, and opportunities for companies such as Thermo Fisher and Danaher. 

2. Financials: Their balance sheets are in far better shape than before the last recession, and their stocks are cheap.

3. Doing more with less: Autodesk and Aspen Technology are among the tech companies helping industrial companies conserve resources.

Worry about:

1. Corporate debt: A spate of mergers and stock buybacks have saddled many companies with high debt—and their costs could rise if interest rates climb. 

2. A regulation revival: Democratic candidates are promising tighter rules on finance and energy, which could mean a rough election year for those sectors. 

3. Indexes gone wild: The dominance of index funds could exacerbate market dips by causing liquidity problems for smaller companies.

A version of this article appears in the November 2019 issue of Fortune as part of the 2020 Investor’s Guide with the headline “Investor Roundtable.”

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