Weekly Digest

Outlook for 2020

Glyn Owen

14 January 2020

Following the worst year for equity markets since the financial crisis, 2019 was one of the best. Many risks failed to materialise: US-China trade wars moved towards a phase one deal, the UK did not fall over the Brexit cliff edge, the World economy slowed but did not enter recession, China’s debt bubble was contained and geopolitics caused ripples but no dislocation. Most important was the policy pivot by the Fed, from a restrictive stance to much looser policy. But corporate earnings were flat, so returns of 28% from world equities leave valuations materially higher than a year ago. Can this bull market, the longest in history, continue?

The big policy pivots by central banks that drove markets in 2019 will not be repeated in 2020. Equally, there is no prospect of a reversal of policy; the Fed is on hold but dovish, while tightening remains a distant prospect elsewhere.

Global manufacturing suffered a recession in the past year but with limited spill-over into consumer and service sectors. Economies slowed, not stalled, and employment remained strong with real wages rising. Conditions suggest modest but sustainable growth ahead.

The removal of the worst fears about trade wars and Brexit reduce risks and help to restore confidence and investment. With the prospect of a hard left government in the UK also despatched, and a government with the vision to grasp Brexit as an opportunity not a disaster, the prospects for the UK are much brighter.

Reduced risks, positive effects of monetary easing and increasing likelihood of fiscal stimulus suggest that the worst of the global growth pause is behind us, providing a better backdrop for the corporate sector. But risks remain.

With unemployment low across the developed world any pick up in growth, and particularly a shift to fiscal policy to stimulate growth, could result in higher real wages, pushing up inflation. While this seems a low risk, it could result in earlier monetary tightening than currently expected and would have a high impact on markets.

The US Presidential election raises uncertainty, especially if the Democrats select a candidate who would roll back Trump’s business friendly policies. A second Trump term seems the most likely outcome, and while this suggests continuity it also means continued unpredictability.

That means setbacks in trade wars cannot be dismissed. The President’s unpredictability is already evident this year, with a dramatic escalation in the dispute with Iran which could further destabilise the Middle East and deliver an oil supply shock.

Finally, high debt levels remain a headwind to growth and stability. There are no liquidity shortages, banks are well capitalised and ultra-low interest rates make debt more affordable than in previous cycles, but high debt is a constraint to growth and a problem in the event of a turn in the interest rate cycle.

Balancing these risks against the broadly favourable economic and monetary backdrop, we expect markets to make further progress this year. We see the best opportunities in equities but diversification remains the cornerstone of our approach, blending core exposure to global equities with infrastructure and property investments along with non-correlated assets including US Treasuries, specialist fixed income, liquid alternatives and gold. With true diversification and tactical exploitation of the inevitable setbacks, we believe that mid to high single digit returns are achievable in 2020.

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