Following renewed monetary easing from global central banks, economic growth could be poised to reaccelerate in 2020. However, investors will need to be vigilant, as a major political or financial shock may trigger a renewed downturn. We see a number of global issues investors must keep a close eye on in 2020.
Renewed efforts by the US Federal Reserve and other key central banks to support the global economy with monetary easing appeared to be working as 2019 drew toward a close, potentially setting the stage for a reacceleration in economic growth in 2020.
As 2019 drew to a close, we saw three signs that growth and inflation expectations might be bottoming. Firstly, as of late November, manufacturing and export indicators appeared to be stabilising. In addition, copper prices – traditionally a key signal of global industrial activity – also had rebounded. Finally, the US Treasury yield curve, which briefly inverted across the 2 to 10‑year segment in August – a phenomenon that may occur ahead of a recession – returned to a positive slope.
However, these signals do not mean the global economy is entirely on solid footing. A major political or financial shock potentially could trigger another slowdown in growth or even tip the world economy into recession.
US equity earnings forecasts may be ‘overly optimistic’ As of late 2019, the US economy remained in an expansion, largely sustained by consumer spending. But a slowdown in capital spending had put the brakes on earnings momentum, with 2019 per‑share earnings growth for companies in the S&P 500 Index expected to be in the low single digits. As of late November, forward‑looking multiples for the S&P 500 appeared somewhat high, in our view, although not exceptionally extended in historical terms. However, those valuations were predicated on consensus estimates of roughly 10% earnings growth in 2020. That might have been overly optimistic. If an economic re-acceleration does not materialise or is not strong enough to produce the expected earnings gains, we believe equity markets have a lot of room for the downside.
Past performance is not a reliable indicator of future performance. Source: Citigroup, as at 30 September 2019
European equity outlook depends on bank earnings European economic and earnings growth both were weak in 2019, as the slowdown in global trade hurt Germany’s export‑dependent manufacturing sector. Although European economies started to see ‘green shoots’ of recovery late in the year, we think longer‑term factors – such as declining populations and weak productivity – could limit growth to 1% in 2020.
The European equity outlook also will depend on earnings in Europe’s financials sector, which has a heavy weight in regional indexes. However, low interest rates and flat or inverted yield curves are major obstacles. We believe that for European equities to do well, banks need to be able to start making positive spreads on new lending.
Reflation needed to continue Japanese stock boost Japanese equities – like Japan’s economy – remains vulnerable to the global economic cycle. As a result, Japanese equities lagged other major developed markets in early 2019. However, by the same token, we believe Japanese equities stand to benefit disproportionately from an improved global outlook. Whether this relative trend persists in 2020 will depend on a continued global reflation.
China growth impacted by trade and structural factors China’s growth slowed sharply in 2019, and we think it is likely to continue decelerating in 2020. This slowdown is only partially due to the trade war, with high debt levels and declining demographics also imposing structural constraints.
Chinese policymakers appear less inclined than in past slowdowns to stimulate credit and spending, as curbing debt growth among highly leveraged financial institutions appears to be a higher priority. On the positive side, China’s consumer market continues to expand, driven by real (after‑inflation) gains in wages and household disposable income.
EM equities inexpensively priced relative to the US Like Japan, the emerging market (EM) economies as a group are highly leveraged to the global economy. This led to volatile equity returns in 2019. With currency values adjusted on a purchasing power parity basis, EM equities appeared inexpensively priced as of late November– particularly compared with the US market. Currency effects could boost this appeal if the US dollar weakens in 2020. We believe attractive valuations and potential currency gains also could benefit developed non‑US equities in 2020. As of late November, on a cyclically adjusted basis, relative price/earnings ratios favoured non‑US equities by the widest margin since at least 1995.
What investors should watch in 2020 By Yoram Lustig
Globally synchronized monetary stimulus could have a profound impact on currencies, high quality fixed income and risk assets. For currencies, an easing Fed could lead to a weaker US dollar – which could boost emerging market currencies and the Japanese yen.
High quality government bonds and investment grade credit may get a boost from falling rates in a low inflation and slow growth environment. This would boost US Treasuries and UK Gilts, as well as global investment grade credit.
As for risk assets, as rates decline, the discount factor falls, and the prices of assets may rise further. As long as the economy does not derail, risk assets – such as equities, high yield bonds and EM debt – could benefit.