HSBC Global Asset Management's global chief strategist previews the upcoming year from an investor perspective, offering his insight on the performance of the US economy, European and emerging market equities, Asian credits and government bonds.
Investors are currently in the age of uncertainty, with many political and economic unknowns and unprecedented macro situations playing out. But after significant uncertainty already this year, an important question for investors is how intensely it plays out again in 2020.
As investors, we need to be vigilant. There are a number of big, unresolved issues and a sequence of other key political events that could play out adversely – or perhaps better than expected – for the macro economy and financial markets.
The really big lesson from 2019 is that even if uncertainty remains a prevalent feature of the system, we shouldn’t automatically be seduced into a cautious investment strategy. Going to cash at the start of 2019 felt safe and sensible, but it turned out to be very costly for investors.
Our baseline scenario for 2020 is relatively favourable. We anticipate slow and steady growth, low inflation, accommodative policy and single digit profit growth. In our view, a recession seems like more of an issue for 2021, or even beyond.
US macro outperformance to fade
The last 18 months have been characterised by US macro outperformance. For 2020, we expect a small reversal of that trend and some growth convergence. The boost from tax cuts is fading in the US, uncertainty related to trade policy appears to be weighing on investment, and labour market indicators are moderating. However, policy easing and robust consumer finances should prevent growth dropping below trend.
US core inflation remains below 2% and is likely to converge to target only gradually. The Fed’s primary concern is that inflation may continue to undershoot its target. That means that while policy is on hold for now, rate hikes are more likely than rate cuts, but our assumption is that we’ll see one further cut next year.
Asia leading EM recovery
Since Q1 2019, growth in China has recovered somewhat and any further pick-up is likely to be gradual given that headwinds from trade uncertainty are likely to persist and policy easing has been relatively modest. Despite this, we think that policy makers stand ready to provide further support if needed, limiting the chances of a renewed slowdown.
The bottoming of growth in China has coincided with tentative signs of stabilisation in other emerging markets (EMs). Asian EMs in particular appear to be recovering. With only modest Chinese growth and trend-like US growth, it is unlikely that EMs will experience a strong upturn, but the recent improvements in the Asian technology and trade cycles bode well for near-term growth momentum.
With US policy set to remain mildly accommodative, no obvious trigger for a rapid appreciation of the US dollar, and with muted local EM inflation pressures, the conditions appear to be in place for reasonable EM macro performance in 2020.
Europe and Japan remain the laggards of the global economy, but a gradual improvement in EM growth should help European export performance. ECB policy easing should also support domestic demand. Overall, 2020 could see a modest recovery in the Eurozone, which would benefit the UK – especially if there’s greater clarity on the future relations between the two economies.
Pro-risk asset allocation
Market pricing remains attractive for some riskier asset classes such as European and EM equities, and for parts of fixed income where rate duration is not very high and yields are attractive, such as Asian credit. As a result, we will remain pro-risk in our asset allocation as we enter 2020.
However, we have to be realistic about the kinds of returns that are achievable. Downside risks such as a global growth recession look more remote at this point, but prevailing uncertainty limits the upside that we can expect from our strategy.
As we move into 2020, we advocate smart diversification. Government bonds have had an extraordinary return profile over the last couple of years and have been incredibly successful hedges for global equity risks. But the forces that have supported bonds so far may be gradually beginning to reverse. That suggests the asset class may be a less reliable diversifier going forward than it has been in the past.
As asset allocators, we need to adapt to that change. The key to success in the “age of uncertainty” will be to continue to be dynamic in how we build our asset allocation.
