It’s tough to make predictions, especially about the future. And it is better to be roughly right than precisely wrong. So with that in mind here’s some fairly vague but fairly concise thoughts on what might happen next year.
Can global growth recover in 2020?
The worst may well be over. With central banks towing the line, there is evidence that we have already seen the bottom of the cycle. There is of course a risk that we are too complacent, but the outlook seems a little more favourable for the global economy. Whilst Europe is probably still the weakness, key risks around trade and Brexit have ebbed away. Political dangers in Italy have fizzled out, whilst Emmanuel Macron seems to be winning the battle in France. A major risk in the next presidential election can be avoided until 2022. Meanwhile in the US, growth rates are seen continuing on a solid path but not so good as to warrant the Federal Reserve intervening to cool it down.
Even before the US-China phase one deal was announced, the pace of global economic expansion hit a four-month high in November, with growth rates improving in both the manufacturing and service sectors. The J.P.Morgan Global Composite Output Index posted 51.5 in November, up from a 44-month low of 50.8 in October. There is hope that the bottom has been found already. A softer dollar ought to help support EM growth.
Solid outlook for sterling after progress on Brexit
Following the Conservative Party victory, 2020 will see a final Brexit settlement that ought to unleash sterling. However, there are risks again due to the government’s policy of setting the deadline to leave the transition agreement in stone for December 2020. This creates a new cliff-edge, which brings no-deal risks to the fore, which will undoubtedly lead to volatility for sterling in 2020, with the upside capped until we get further into the year.
Neil Wilson at Markets.com says that he expects reasonably steady progress on trade talks with the EU (albeit headline risk will be high) – Boris will settle and do a deal and truly ‘get Brexit done’.
“There is no appetite to leave the transition arrangements without some kind of agreement,” Wilson says. “It may not be perfect, but it will suffice. We would also expect flows into sterling via property and equities to support the speculative long positioning which should materialise and end a long run of the market being net short. And having already retraced the election night move back to $1.30, GBPUSD now offers lots of upside.”
What about the Euro in 2020?
In September, outgoing European Central Bank boss Mario Draghi delivered in many ways with a package of cuts and fresh QE. But it’s increasingly clear the ECB is out of ammunition. Wilson thinks Draghi delivered all he could with a last blitz of stimulus in a kind of Butch Cassidy and the Sundance Kid type finale. Lagarde and others at the ECB may well believe they can cut deeper, but there the marginal impacts are now tiny from any more easing. A change is required and there are just one or two tentative signs that governments are listening.
It’s clear the ECB cannot just keep cutting rates – the baton will have to be passed sooner or later to the fiscal side. As we’ve talked about before, it’s the rate of change of expectations for monetary policy, not the pace of change in the monetary policy itself, that really drives currencies. And in this sense, expectations may have altered course as markets accept that there is no more ammo left. It may be catching a falling knife, and we caution that this is very early days indeed, but the euro may be in the nascent stages of a long-term rally.
More to come from US stocks?
Low volatility, central bank liquidity on tap whenever you need it– stocks should grind higher at the start of the year as recessionary risks have receded, and the Fed has been cowed. No hikes in 2020, possibly two cuts. The Fed’s great experiment with quantitative tightening has been abandoned for the foreseeable future. It’s now conducting QE by stealth with massive repo operations. The question is whether it goes for further cuts in 2020 or rattles the market by refusing to cut again. Fundamentally it’s hard to see this Fed rocking the boat. And the old adage should hold: don’t fight the Fed.
US earnings growth ought to recover from a rougher patch and access to credit will remain easy. Corporate high yield debt is about as low as it’s ever been thanks to the Fed’s pivot through the summer of 2019. Recessionary risks have abated but not gone away entirely.
Election risks can be overstated but uncertainty over who will be in the White House in January 2021 will create volatility later in the year. Watch for the Super Tuesday in March and convention in July when we will learn Trump’s opponent. Markets tend to rally in election years. The main risk to the thesis is that a Democrat win in the autumn heralds an about turn in risk appetite as it could mean higher taxes and more regulation. We could see some volatility induced by the election creep in later in the year, though as bears have found to their cost, all that will do is jolt the Fed into action to soothe things.
Progress on a more comprehensive US-China trade deal may be solid, it may be patchy, it may be terminally slow. But if 2019 is anything to go by, the market is not that bothered as long as there is such an excess of liquidity on tap. Donald Trump may prefer to wait until after the election to do anything further, but this may only see gains back-weighted to the end of the year.
What are the key US market risks in 2020?
Assuming the two sides finalise their phase one deal, a failure to make further progress on a US-China trade deal will be a problem. If there is deterioration in relations, then the biggest risk is the re-imposition of tariffs that were rolled back under the (currently expected) phase one deal. A Democrat win could result in radical reforms on businesses and tax. Inflation could come through significantly, forcing the Fed, if not to hike, at least tweak its stance and language.
UK looks well-positioned going into 2020
Strong pound and a strong FTSE? That correlation broke down after Brexit but should emerge again in 2020 as confidence in UK plc plays out with gains for both the pound and blue chips. The removal of the Corbyn risk is a huge factor in reassessing risks for British stocks and the pound. Moreover, with global fund managers being so underweight UK equities for the last three and a half years, the rotation back into UK stocks should offer considerable support as flows turn aggressively positive, albeit a considerable portion of the upside was taken out in the wake of the election on Dec 12th.
Nevertheless, fundamentally undervalued UK equities – forward PE multiples have been very cheap versus European and US peers of late – will now look especially appealing as they have largely missed out on the rally seen elsewhere. Meanwhile we should have higher government spending coming which is likely to support growth and earnings. A reappraisal of beaten-up UK stocks will hinge on the economy doing well – a lot depends on the global growth and trade outlook, not just Brexit and what the government does.
Our thanks to Neil Wilson and Markets.com for their help with this article. www.markets.com
