The market outlook for 2020 seems brighter than it did just a few months ago, as the three major global central banks expand their balance sheets. However, considerable political and economic risks remain.
With monetary policy worldwide largely committed to ensuring market liquidity and supporting economic growth, the market outlook for 2020 appears considerably brighter than it did at the midpoint of 2019.
To put it another way, we do not believe investors will want to stand in the way of the three major central banks – the US Federal Reserve, the European Central Bank and the Bank of Japan – when they are expanding their balance sheets.
However, considerable downside risks – both political and economic – remain. Although equity valuations overall do not appear extended relative to historical averages, forward‑looking multiples in the US market may reflect overly optimistic forecasts for 2020 earnings.
Global credit markets are unlikely to deliver the double‑digit returns seen in 2019, but attractive opportunities can still be found in emerging market (EM) debt and high yield – assuming the economic data confirm the reflation expected in 2020 is actually underway.
By contrast, low or negative yields on many sovereign bonds create the risk of subpar returns or even capital losses if a strengthening global economy causes interest rates to rise. However, sovereigns potentially can still be a useful hedge against extreme political or economic shocks.
Non‑US equities – EM equities in particular – appear attractive based on relative valuations, raising the possibility the long streak of underperformance relative to the US market could be broken in 2020. However, stronger global growth – and in Europe, improved banking margins – will be essential.
In an uncertain market environment, investors will need to be ‘comfortable with the uncomfortable’ to take advantage of potentially attractive opportunities. As always, with a wide dispersion of returns both in and among sectors and industries, in‑depth fundamental research will be particularly critical for identifying potential opportunities and risks.