2020 outlook – hidden in plain sight

5 min read 6 Dec 19

Summary: Equity markets have remained relatively resilient year-to-date, despite investors facing multiple headwinds. In this month’s video, Investment Director, Ritu Vohora takes a look back at the factors that characterised the landscape in 2019, and also looks ahead at what could influence markets in 2020.

As we draw to the close of 2019, the year has been characterised by trade wars, geopolitical tensions, slowing global growth and central bank easing. Equity markets have remained relatively resilient year-to-date, with most regions logging double-digit gains, in US dollar terms.

Improving trade rhetoric and better than expected earnings saw investors turn risk-on in November. Riskier assets rallied, with developed markets continuing to outperform their emerging market counterparts and cyclical sectors outperforming defensive sectors. Technology and industrials led the gains, while bond-proxy sectors such as utilities, real estate and telecoms underperformed as investor sentiment improved. US equities rallied to new highs, with the S&P500 index up 28% year-to-date.

In the UK, the FTSE 250 led gains over the month on the back of a stronger pound, with polls pointing to a possible conservative victory in the December election. The trend of mid-cap stocks pulling ahead of large-caps has been reflected over the year.

Brent crude staged a recovery, having suffered a pull-back following the Saudi oil attacks earlier in the year, and remains a top performer year-to-date. Gold also regained its lustre, with market uncertainty and mounting piles of negative-yielding debt prompting investors to rotate into the precious metal. However, the recent rise in government bond yields saw gold weaken in November, while 10-year government bonds in the US, Germany and Italy also tracked lower.

As we head into year-end, investor sentiment has been buoyed by hopes of a Phase 1 US-China trade deal, stabilising data and a monetary policy tailwind.

We have seen some improvement in economic data more recently, including better-than-expected manufacturing data out of the US, Europe and China. New orders are picking up and inventories have closed the gap with activity – a positive for the near-term growth outlook. A US recession is unlikely over the next few quarters, and the manufacturing activity downturn witnessed over the past 18 months could turn around if we have progress on trade. As recession fears fade, renewed investor optimism has prompted a rise in bond yields and a rotation into more cyclical areas of the equity market.

This is in contrast to the wall of fear that gripped markets this time last year, with the Fed tightening and China’s stimulus efforts yet to offset trade headwinds. Since then, several central banks have eased policy, led by the Fed, which has pivoted to a new easing cycle. Meanwhile Mario Draghi’s parting gift was more quantitative easing and China has also implemented a broad range of growth-enhancing measures.

Loose monetary policy has provided a liquidity boost and offset some headwinds. But doubts remain over the effectiveness of monetary policy alone, and the mechanisms to filter down into the real economy. It should therefore be more positively impactful for asset prices than the overall economy. However, given prolonged easing by global central banks, there are questions around how much dry powder remains to shore up the global economy going forwards. Policy makers may look to governments to embark on greater fiscal stimulus, but if markets are already starting to factor this in, there could be potential to disappoint.

Indeed, the factors that have influenced market behaviour throughout 2019 are unlikely to abate and we can expect continued uncertainty in the new year. Signs of global economic improvement, anticipation of easing trade tensions and hopes of positive momentum in corporate earnings, are feeding growing expectations of a global growth ‘trough’ in the near term. Stabilisation in global growth indicators could provide a boost to earnings, while progress on trade will benefit export-led economies such as Germany and Japan. However, corporate margins could remain under pressure until we see a broader pick-up in global trade activity.

For now, while business sentiment has weakened, and investment has remained subdued, the services sector is holding up and consumer confidence is still relatively robust. In 2020, much will depend on the evolution of trade talks and the stability of the political landscape. Greater clarity would likely provide a boost to business confidence and investment, bringing them closer in line with consumer confidence. On the other hand, risk of a hard Brexit, US impeachment proceedings and the Presidential election have the potential to destabilise markets.

Equity multiples remain undemanding versus history and other asset classes. But price rises need to be supported by earnings to be sustainable, a stabilisation in earnings delivery should enable equities to continue to grind upward. However, given that we are starting from a position of strength, returns may be slimmer. That is probably a good thing, if it keeps central bank hawks away.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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