Tepid Growth Amid Volatile Headwinds​

2020 Economic Outlook

Despite persisting global uncertainties, we hold a cautiously optimistic outlook for the world economy in 2020. Major headlines, including the US-China trade war and Brexit, are likely to continue influencing the global economy; however, the 2020 macro environment may mark a stark shift from the dynamics of 2019 – a year characterized by an unusual late-cycle dovish pivot by central banks to help offset the negative effects of rising trade tensions.

2019’s vulnerabilities to drive 2020’s performance

Global economic activity indicators suggest that the economic slowdown has continued into the beginning of 2020. That said, due to favorable macroeconomic policies and de-escalation of the US-China trade war, we are confident that the slowdown will transition into moderate global growth in 2020.

Business sentiment lagged in 2019. Poor German manufacturing numbers weighed on the European economy, trade disputes increased economic uncertainty, and business confidence in investment was unstable. Furthermore, while the risk of a no-deal Brexit still persists, the British parliament has confirmed that Brexit cannot be extended beyond 2020. We anticipate the EU and the UK to reach a deal around summertime this year as further postponement would be detrimental to both parties’ interests.

Meanwhile, a combination of favorable Fed policy and a more relaxed atmosphere between the US and China will help support the US economy throughout a heated election season – potentially extending its longest expansionary cycle in history. Though there are few signs of recession, slowdown is a natural stage of the economic growth cycle.

Despite expansionary policy from major central banks across the globe reaching record highs in 2019, central banks and policymakers are widely expected to provide additional support for an ailing business climate and further stimulate business investment in 2020 – particularly as fears of a global recession fade.

Overall, we remain optimistic for 1H20 while cautious for 2H20.

Regional Economies

U.S.

We project 2020 US GDP growth between 1.8-2.1%. Despite business investment uncertainties and slowing corporate margins, the services sector, as the largest contributor to domestic economic growth, will continue to grow and further drive labor demand, ultimately pushing income levels higher. As a result, we anticipate US unemployment to stay at historic lows with robust US consumer sentiment and consumer spending. Furthermore, the Phase One trade deal with China coupled with lower rates from the central bank are easing financial conditions amid a general economic slowdown.

Europe

An easing global trade environment in tandem with support from monetary and fiscal policy will positively impact 2020 GDP growth figures. In particular, while a boon to Europe’s economy in 2019, German manufacturing numbers are expected to recover from improving trade conditions over the coming year. However, spillover from manufacturing activity into the labor market will limit economic growth to some extent. Furthermore, inflation will continue to flatline as core factors like wage growth are likely to remain low. As a result, we expect moderate growth in Europe in 2020.

Japan

Japan’s consumer tax hikes in 4Q19 are expected to slow growth in 1H20; however, GDP growth is likely to catch up in 2H20 due to government approval of large supplementary spending in December 2019 as well as fixed investment- and private consumption-driven improvements in the domestic economy. Furthermore, despite a recent survey claiming that a majority of economists believe that the country’s ultra-low interest rate policy has had limited positive impact on the economy, it is still believed that the BOJ will maintain its expansionary monetary policy as stubbornly low inflation is anticipated in 2020.

China

We anticipate deceleration of GDP growth in 2020, however as 2020 marks the final year of the 13th Five-Year Plan for the Economic and Social Development of the People’s Republic of China, the Chinese government is likely to adopt countercyclical policy adjustments to ensure 2020 GDP doubles that of 2010. While skyrocketing meat prices may subject the domestic economy to high inflation in 1H20, reduced inflationary pressure in 2H20 will give the Chinese government sufficient maneuverability to implement economic stimulus policy.

Though the Chinese economy will continue to slow in 2020, it is widely anticipated to receive strong central support via favorable policy. Policy maneuverability will likely be inhibited in 1H20 but gradually expand throughout 2H20.

Markets Outlook

Equities continue to perform, overexposed to policy limitations

Partially boosted by low interest rates, global equities delivered positive returns in 2019 amid a backdrop of slowing economic growth. In particular, the US stock market continued its more-than-a-decade bull run. As mentioned above, we anticipate the US economy to perform decently in 2020 despite hesitant corporate investment, rising labor costs, and omnipresent global trade tensions.

Market liquidity remains well supported by favorable Fed policy. The current low interest rate environment will drive capital to markets capable of higher returns. While equity markets will decidedly benefit from the current low-rate environment, volatility and general risk management will be critical as equities creep higher. Aside from the US, we expect equity markets in developed markets like Europe and Japan with ultra-loose monetary environments to struggle to perform due to central bank inability for further monetary easing in 2020.

Comparatively, equity markets in emerging markets will become more appealing as aggregate economic growth in these regions remain the primary engine driving the global economy. According to the World Economic Outlook release in October 2019, the IMF has forecasted emerging market growth of 4.9% in 2020 – nearly three times the estimate of 1.7% for developed markets. Furthermore, emerging markets also have more room for expansionary monetary policy than developed countries with extremely low benchmark rates.

Policy Rates of Major Economies (%)

Source: Bloomberg

Low interest rates define fixed income markets

Fixed income yields hit record lows in 2019 and are expected to remain low throughout 2020.

In Japan, Germany, and many other developed markets, yields have turned negative. Though zero or negative yields rarely result in investors actually paying to hold bonds, they are symbolic of the premium attached to financial instruments that are perceived as safe investment channels. Furthermore, ultra-low yield rates when introduced into a moderate-to-high inflation environment could further adversely affect investor yields. While we do not anticipate further yield cuts in developed markets that currently exhibit negative yields, the current low yield environment is unlikely to improve in the near-term.

In the US, a strong labor market and inflation near 2% led the Fed to conclude a year of three rate cuts with December 2019 fund rates well within the target range of 1.5-1.75%. The committee further indicated that monetary policy is likely to remain unchanged for an unspecified time. The recent “dot plot” of individual members’ future projections even showed, on balance, no change in 2020, while the implied Fed Fund Rate showed a chance of one rate hike at the end of 2020.

10-Year Government Bond Yields by Country (%)

Source: Bloomberg

US dollar exchange rate expected to remain stable

Barring hawkish moves from the Fed, the US dollar will become less appealing in 2020. That said, given its role as the world’s dominant reserve and safe-haven currency, demand for the dollar is likely to provide price stability throughout the year and support its value amid potential economic turbulence.

2020 Investment Outlook

Looking ahead at the year to come, we believe that overall macroeconomic conditions, policy decisions of major economies, and political uncertainties will remain the main considerations when building a successful investment portfolio.

We recommend investors to consider risk-optimized strategies that reduce volatility and add explicit protections to hedge against market downturns. This can be achieved through increased diversification of asset allocation, particularly through the inclusion of alternative assets in investment portfolios.