This three-part blog series provides a detailed investment outlook for 2020, including our 5 reasons for optimism,
At the beginning of 2019 the market had shifted its thinking on interest rates and US rates began to rise. But as 2019 progressed, investors welcomed the world’s central banks’ about-turn on interest rates and pushed share markets sharply higher.
Australia’s economy grew slowly at around 2% in 2019 weighed down by the housing construction downturn, weak consumer spending and drought. Nonetheless, the share market rose by almost 20% as weak wages growth kept inflation low, causing central banks to ease rates further. The US Federal Reserve (The Fed) cut rates three times, as did Australia’s RBA (from 1.5% down to 0.75%) and the European Central Bank (ECB) restarted quantitative easing.
So despite Trump’s trade war, political turmoil, high debt levels, inequality and the rise of populist leaders, virtually all major growth assets posted once-in-a-decade high performance. While much of the news in 2019 was bad, monetary easing and the prospect it provided for strengthening growth taken altogether with the low starting point of Christmas 2018 actually resulted in strong returns for investors.
The law of averages suggests investors will earn less this year… even so, there’s many reasons for investor optimism in 2020. Firstly, years of sharp gains are not usually followed by falls, rather by more modest growth. So let’s approach 2020 positively.
5 reasons for optimism in 2020
- Eased trade war and US election reduces recessionary risk
- Interest rates and inflation to stay low
- Early signs of improving global economy
- Infrastructure (and fiscal) spending in Australia
- Long-term value in growth assets
Let’s break these down…
1. Eased trade war and US election reduces recessionary risk
While the slowdown has persisted for longer than expected, largely due to President Trump’s trade war but a global recession remains unlikely. The normal excesses that precede recessions like high inflation, rapid growth in debt or excessive investment have not been present. While global monetary conditions tightened in 2018, monetary conditions have now turned very easy again with a significant proportion of central banks easing in 2019.
Since his election in 2016, President Trump has disregarded liberal global world order, attacked allies and befriended old enemies. But as the November election nears Trump is soothing trade tensions. The latest partial trade deal with China this month (January 2020) shows Trump’s desire to de-escalate the trade war and to reduce risk to the US economy after reshaping US trade policy with a direct enforcement system outside the WTO. No doubt he realises that if he let the US slide into recession he wouldn’t be re-elected.
A longer-term risk might arise if the trade deal proves unworkable and the Trade war could even re-start if Trump is re-elected.
Leading up to the US election, other geo-political risks may also be subdued. Typically a looming election reduces appetite for military conflict. Of course, this is a risk in itself as others may take action assuming the US won’t respond. The global rise of populism and escalating tensions with Iran are also ongoing risks.
In the UK, a “hard Brexit” seems unlikely, though some risks remain.
2. Interest rates and inflation to stay low
In 2019 investors welcomed an about-turn on interest rates from the world’s central banks and pushed share markets sharply higher.
While global growth is likely to pick up in 2020 it won’t be overly strong and spare capacity will remain. This means inflationary pressure will remain low and in turn points to continuing easy monetary conditions.
With the economy remaining below full employment and the inflation target in Australia, our RBA is expected to cut rates to 0.25% early this year (currently at 0.50%). There’s even been talk of quantitative easing.
3. Early signs of improving economy
Late in 2019 there were early signs of an improving global economy. One key measure getting some attention is the ‘Purchasing Managers Index’ (PMI) which has increased over the last few months suggesting that monetary easing may be getting traction.
So in 2020 the consensus is for global growth to stabilise and gradually move up. This should in turn begin to support company profit growth.
4. Infrastructure (and fiscal) spending in Australia
At home, our Government has committed to $100 billion of infrastructure spending. A Federal Budget surplus is less likely as bushfire recovery alone could take up to 1% of our GDP growth this year, costing anywhere between $3 – $13 billion. Will the Government shelve the surplus in favour of government (fiscal) spending stimulus?
Popular and institutional consensus supports the need for such stimulus. Unfortunately, fiscal policy reflects politics so it’s neither simple nor transparent. Poorly implemented, it can impair performance of equity markets without the usual mitigating influence of lower bond yields. Implementation error can take the form of long time lags and ‘quick cash flow’ projects (think pink batts and school halls). With global tech companies increasingly the beneficiaries of our consumer dollar, the Government will need to carefully consider where the money would flow if it sought to stimulate consumption.
Nonetheless, we think the strength in infrastructure spending and exports will help keep our economy growing, albeit constrained to around 2% by subdued consumer spending, business confidence and the drought.
5. Long-term value
While valuations in equity markets at the beginning of 2020 are not as attractive as valuations at the beginning of 2019, compared to bonds and term deposits the market still looks cheap. Especially so if you take a longer-term view. Our 10-year forecasts for the major markets are as follows:
Source: Farrelly’s & Wotherspoon Wealth
While our forecast for International Equities is lower, we anticipate higher returns from the ‘world excluding US Equities’ at around 9.70% p.a. This year, in particular, we see value in emerging markets, especially Asia.
Interest rates are expected to stay lower for longer and the US election should provide reason for easing global trade tension but investors must remain vigilant.
Click below to read on…
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.