2020 Global Outlook
Powerful structural trends are testing limits – and threaten to intersect with the near-term outlook and become market drivers. We revisit our themes and investment views with this February update.
Powerful structural trends are testing limits — and threaten to intersect with the near-term outlook and become market drivers. Rising inequality and a surge in populism have implications for taxes and regulation.
Trade frictions and deglobalization are weighing on growth and boosting inflation. Interest rates are nearing lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real-world consequences, affecting asset prices as investors start to pay attention.
Growth should edge higher in 2020, helped by easier financial conditions. We retain our moderate pro-risk investment stance, although the unknown magnitude and duration of the coronavirus outbreak pose downside risks to the global growth outlook. This underlies our call for a focus on portfolio resilience. Financial vulnerabilities are climbing, but our overall gauge of vulnerabilities across the economy stands well short of its peaks ahead of the last recession, as the chart below shows.
The 2020 macro environment marks a big shift from the dynamics of 2019, when an unusual late-cycle dovish turn by central banks helped offset the negative effect of rising trade tensions. The U.S. dovish pivot looks to be over for now. Any meaningful support in the euro area will have to come from fiscal policy, and we do not see this in 2020. Emerging markets (EMs), however, still have room to provide monetary stimulus.
This makes growth the key support of risk assets. Our base case is still for a mild pickup supported by easy financial conditions, with a slight rise in U.S. inflation pressures. We are likely to see support from Chinese authorities to shore up growth, as we have after prior epidemics, though an ongoing desire to rein in financial excesses leaves open the question of how sizable China’s stimulus will be.
The main risk to our outlook is a gradual change in the macro regime. One such risk: Growth flatlines as inflation rises. This might pressure the negative correlation between stock and bond returns over time, reducing the diversification properties of bonds.
A deeper economic slowdown is another risk to consider. There has been a pause in the U.S.-China trade conflict, but any material escalation of global trade disputes could undermine market sentiment and cut short the expected manufacturing and capex recovery that underlies our tactical views.
We remain modestly overweight equity and credit due to the firming growth outlook and pricing that still looks reasonable against the macro backdrop. We still see potential for a bounce in cyclical assets in our base case: We prefer Japanese and EM equities, as well as EM debt and high yield. We are cautious on U.S. equities amid 2020 election uncertainties, and prefer companies with quality characteristics.
Yields that are approaching lower bounds make government bonds less effective portfolio ballast, especially outside the U.S. This causes a rethink of portfolio resilience. We prefer short-term U.S. Treasuries on a tactical basis and like both long-term Treasuries and TIPS as sources of resilience against potential regime shifts in strategic allocations.