Welcome to December – just one more month
until a new year begins (and, depending on how you do the math, a new decade as
well). Naturally, this is the time when market-watchers issue their forecasts
for what may lie ahead, and my team is no exception. Simply put, we expect
continued monetary policy accommodation with little fiscal stimulus. Therefore,
we are more optimistic about capital markets than we are about the overall
economy, and we favor risk assets over non-risk assets for 2020. Below, I
highlight some of the reasons why. An in-depth analysis is available here.
Central banks expected to drive growth
As we look ahead to 2020, it’s clear that
central banks are still shouldering the burden for stimulating the economy via
monetary policy. That should bode well for 2020, in our view. However, we
believe such monetary easing should be more positively impactful for asset
prices than the overall economy. Economic uncertainty is likely to continue to
depress capital spending, in our view, and we must watch vigilantly to ensure
it doesn’t spill over into diminished hiring plans.
- Bottom line: We
expect overall economic growth of about 3% for the globe.
We expect accelerated growth as next year progresses
Our view is that growth bottoms early in
the year at approximately 1%, and then accelerates as the year progresses.
Cycles tend to end with policy mistakes, and the risks have risen. However, it
is our base case that the policy mix will continue to get modestly better. We
believe the Federal Reserve and central banks globally will deliver more
accommodation if necessary to support the economic expansion. And so we do not
expect a recession in 2020.
- Bottom line: We
expect an environment of modest growth of approximately 2% for the US in 2020,
which exceeds consensus expectations.
outlook: A chance of rising rates doesn’t dampen our growth expectations
We believe the Bank of Canada could be one
of the few central banks to raise rates in 2020 (most likely in the second
half). However, we do not believe this will create headwinds — the Canadian
economy and stock market tend to do best in an environment of quickening global
growth, rising commodity prices, and an appreciating Canadian dollar, which
would be consistent with interest rate hikes.
- Bottom line: We
expect Canadian gross domestic product (GDP) growth to exceed expectations at
approximately 2% for 2020.
outlook: Policy responses to sluggish growth may remain elusive
We believe the weakness in the
manufacturing sector may bleed over into the services sector to a greater
extent next year. In response, we expect the European Central Bank (ECB) to
remain accommodative in 2020, continuing quantitative easing purchases and
possibly even cutting rates again. Furthermore, if governments, especially
Germany, appear unwilling to provide fiscal stimulus, we could see the ECB
explore more experimental monetary tools. However, we’re mindful that this
isn’t an easy task. Therefore, further monetary easing may not be possible in
the absence of a deeper downturn or outright recession.
- Bottom line: We
expect economic growth of about 1% or less for the eurozone in 2020.
Dec. 12 election to set the tone for next year
The economic policy uncertainty created by
Brexit has depressed business investment and business confidence. Much of what
happens to the UK economy in 2020 will depend on the outcome of this month’s Parliamentary election and the ensuing Brexit outcome.
- Bottom line: We
expect the UK economy will grow at less than 1% in 2020.
outlook: We expect tax-related headwinds to subside
We expect the Japanese economy to stabilize
in early 2020 after a fourth-quarter 2019 deceleration caused by the effects of
the new consumption tax. We then expect the economy to modestly re-accelerate.
We believe the increased tax burden should slow consumption demand, although
the impact should be much smaller than what we saw with the 2014 consumption
tax increase. We believe the Japanese government is likely to initiate
accommodative fiscal policy to help counter tax-related headwinds, and we also
believe the Tokyo Olympic Games will increase tourism and help boost economic
growth. We don’t expect the Bank of Japan (BOJ) to ease policy unless the yen
strengthens significantly — in which case we would expect the BOJ to consider a
variety of policy tools.
- Bottom line: Our
base case expectation for Japan’s GDP growth in 2020 is approximately 0.4%.
outlook: We see positive catalysts on the horizon
Chinese economic growth has modestly
decelerated, but we believe the fundamentals remain solid as the transition
continues to a consumption, services-led economy. China’s property market
continues to be buoyant and is likely to see continued robust investment
growth, in our view. We expect further softening of the renminbi — but at a
measured clip, which should also be supportive of economic growth. Other
positive catalysts include fiscal stimulus measures that should boost fixed
asset investments, and our expectation that there will be a stabilization in
the tariff wars. But regardless of whether the US-China trade conflict is
resumed quickly, we believe China will utilize the fiscal and monetary tools
necessary to support its economy through the headwinds.
- Bottom line: We
expect Chinese GDP growth in 2020 to be approximately 5.8% to 6%, which is around
Asset class outlooks: We favor risk
assets over non-risk assets
As noted earlier, we expect continued monetary
policy accommodation with little fiscal stimulus. Therefore, we are more
optimistic about capital markets than we are about the overall economy, and we
favor risk assets over non-risk assets for 2020.
Equities: An overall bullish view, with
some regional exceptions
stocks. We believe the monetary policy environment
will remain supportive of equities in 2020. However, we believe investors will
need to be more discerning in this environment. Valuations appear stretched for
US equities, in our view, but we recognize that valuations have not often been
a good predictor of equity performance in the shorter term. In addition, we
believe lower interest rates and low inflation make US equities more
attractive. Also, the dollar has weakened recently because of “quantitative
easing lite” policies that are expected to be ongoing. That should be positive
for US equities. Therefore, we are bullish on US stocks, with the caveat that
investors should expect more volatility in the coming year.
stocks. We are modestly bullish on Canadian
equities. We believe long-term Canadian equity underperformance could be coming
to an end as Canadian stocks enjoy some advantages that may be underappreciated
by investors. The United States-Mexico-Canada trade agreement (USMCA) appears
poised to be ratified, which would benefit Canadian stocks. In addition, the
Canadian manufacturing outlook remains positive, suggesting business sentiment
is positive, which should bode well for equity returns. Also, Canadian stocks
could benefit from a weaker US dollar and the potential for higher commodity
and UK stocks. We are neutral on
European (ex UK) equities. Valuations are very attractive (based on an analysis
of dividend yield and cyclically adjusted price-earnings ratios), but we have
not yet seen signs that the eurozone economy has reached an inflection point.
We are bearish on UK equities. We believe it is reasonable to expect earnings
declines and slower dividend growth, especially since a large portion of the UK
market is exposed to either commodities or banks.
stocks. We are modestly bullish on Japanese
equities given that we envision a moderately brighter economic picture for Asia
and expect limited downside to US long-term yield in our base case, which will
likely result in either more stable or even weaker yen. (It has often been the
case that stronger yen worked negatively for Japan equities, including this
market stocks. Overall, we are bullish
on emerging market equities. Catalysts include a more accommodative Fed as well
as investors’ search for yield, which may drive them to emerging market
equities. Asian emerging equities should benefit from fiscal stimulus in China
and India. Chinese stocks in particular should benefit from Chinese financial
liberalization and the increased weighting of Chinese A share stocks in MSCI
indexes. We are bearish on Latin American equities, many of which are too
closely tied to the fortunes of commodities prices and some of which we expect
to suffer from policy uncertainty. We have a neutral view of emerging Europe
equities given decelerating growth in the euro area.
income: We favor higher-yielding bonds in this environment
believe that higher-yielding investments will outperform given the low rate
environment. Therefore, we are bearish to developed government bonds with the
exception of UK gilts, whose returns should be driven by declining yields.
prefer investment grade credit to developed sovereign credit, given the former’s
higher yields and better total return potential.
are positive on high yield bonds, although we prefer US high yield to eurozone
high yield. Even allowing for a widening of spreads and a rise in default
rates, we expect returns to be better than that of lower-yielding fixed income
are also positive on emerging market debt, also given higher yields and greater
total return potential.
Alternatives: Real estate’s yield potential
may be beneficial
estate. Among alternative asset classes, we are
most positive on real estate, given its relatively high yields and potential
for outperformance in what we expect to be a relatively low return environment.
We favor eurozone and emerging market real estate but favor avoiding UK real
estate until Brexit is resolved.
- Gold. We are bearish on gold. While we recognize the
diversification benefits of gold as well as a lower opportunity cost given
lower rates globally, we expect low returns for gold in the coming year given
the rally it experienced this year. In addition, gold typically performs best
in recessionary or stagflationary environments, neither of which we expect for
- Commodities. We are bearish on commodities, as we believe valuations
are much higher than historical norms for commodities in real terms. In
addition, our historical analysis suggests that industrial commodities have
performed poorly when the Fed is cutting rates.
Cash: Having ‘dry powder’ on hand may be beneficial
during volatile periods
have a slightly bullish view of cash-like instruments, preferring
ultra-short-duration instruments. Our rationale is that such investments can
offer a “safe haven” alternative to gold and are currently more attractive than
gold given the latter’s stretched valuations.
addition, given the volatility markets are experiencing, having adequate cash
on hand enables investors to take advantage of opportunities created by
Blog header image: Greg
Brexit refers to the scheduled exit of the UK from
the European Union.
UK gilts are bonds issued by the British
is an economic condition marked by a combination of slow economic growth and
Quantitative easing (QE) is a
monetary policy used by central banks to stimulate the economy when standard
monetary policy has become ineffective.
Gross domestic product is a broad
indicator of a region’s economic activity, measuring the monetary value of all
the finished goods and services produced in that region over a specified period
Risk assets are generally
described as any financial security or instrument, such as equities, high-yield
bonds, and other financial products that carry risk and are likely to fluctuate
All investing involves risk, including the risk of
Past performance cannot guarantee future results. Diversification does not
guarantee a profit or eliminate the risk of loss.
Fixed-income investments are subject to credit risk of the issuer and the
effects of changing interest rates. Interest rate risk refers to the risk that
bond prices generally fall as interest rates rise and vice versa. An issuer may
be unable to meet interest and/or principal payments, thereby causing its
instruments to decrease in value and lowering the issuer’s credit rating.
The risks of investing in securities of foreign issuers, including emerging
market issuers, can include fluctuations in foreign currencies, political and
economic instability, and foreign taxation issues.
Commodities may subject an investor to greater volatility than traditional
securities such as stocks and bonds and can fluctuate significantly based on
weather, political, tax, and other regulatory and market developments.
Stock and other equity securities’ values fluctuate in response to
activities specific to the company as well as general market, economic and
Alternative products typically hold more non-traditional investments and
employ more complex trading strategies, including hedging and leveraging
through derivatives, short selling and opportunistic strategies that change
with market conditions. Investors considering alternatives should be aware of
their unique characteristics and additional risks from the strategies they use.
Like all investments, performance will fluctuate.
opinions referenced above are those of the author as of Dec. 2, 2019. These comments should not be construed as
recommendations, but as an illustration of broader themes. Forward-looking
statements are not guarantees of future results. They involve risks,
uncertainties and assumptions; there can be no assurance that actual results
will not differ materially from expectations.