Willis Owen’s outlook for 2020
Posted by Adrian Lowcock in Press releases category on 10 Dec 19
Valuations are cheap, there are plenty of opportunities for investors. Having had years of austerity, the UK looks to be ready to boost fiscal spending which should be supportive of the economy and stimulate growth. This should begin to feed through to the economy in the second half and may offset fears of a no-deal Brexit when the transition agreement expires at the end of the year. The UK market is not immune to the global economy as it is international in nature so US-Chinese trade negotiations will matter.
Valuations became more stretched in 2019 as markets continued upwards in spite of the economy slowing slightly. However they are not extremely expensive so there is still opportunity for investors. Whilst we think the US economy will recover in 2020 as interest cuts begin to work, the US-Chinese trade situation remains a key issue and further tariffs will have an impact. Economic growth is likely to remain slow (but has been buoyant so far and interest rates low. Given a lower growth environment, US companies will need to deliver earnings growth to support further performance in the US stock markets. A fiscal stimulus programme would support this but the US Presidential elections will overshadow markets for much of 2020. The US remains home to some of the most innovative tech innovations (just to give a more positive angle) not all off which trade on excessive valuations. Eg Microsoft –cloud computing
Europe’s exposure to trade and reliance on manufacturing made it a casualty of the trade war and the global downturn in 2019. However, the European Central Bank (ECB) cut interest rates further into negative territory and re-started quantitative easing. The region should benefit in 2020 from easier monetary conditions, the recovery in global manufacturing, the possible lifting of trade-war uncertainty and Chinese policy stimulus that increases import demand from emerging markets.
Political risk though remains an almost ever present factor, the potential easing of Brexit uncertainty is a positive and whilst the political outlook across Europe has improved it remains an ever present issue.
The country avoided a meaningful slowdown in 2019 by allowing the currency to depreciate and through macro policies. In 2020 the region is likely to focus on the quality of growth over absolute growth as it looks to limit leverage and property speculation. The trade war is having an effect and that uncertainty is likely to keep some investors away. However, valuations are not expensive, growth remains attractive compared to the rest of the world and the country’s central bank is willing to take action to support steady growth. The country is opening up its markets to the world which means more money will be allocated to the region over the coming years. The growing middle class demographic remains a positive for consumer spending.
The Japanese economic outlook for 2019 is fairly mixed as the export-focused country was affected by the global slowdown. For 2020 the rise in consumption tax is likely to affect consumer demand but the country should benefit from a boost as it hosts the 2020 Olympics. If global growth recovers and trade wars do not escalate then Japan should also benefit from improving exports. At the same time the country is also benefitting from domestic reforms which have helped boost corporate governance and produced a greater focus on shareholder returns. Valuations are low and do not reflect the changes in the country. If the macro issues of a trade war and global slowdown are resolved Japan looks very interesting.
The ongoing US-China trade dispute has sapped momentum in many regional Asian economies and the economies are unlikely to recover quickly whilst both US and Chinese growth is slowing. However, a resolution to the trade war, stabilisation in China and further rate cuts in the US – which should lead to a weaker US dollar, would all be supportive to a more positive outlook on the region. The risk that further disruptions in global trade would impact on the region.
Emerging Markets is a very diverse asset class and whilst there are signs of development with many emerging markets becoming global leaders in technology, healthcare and software, the region is still very sensitive to US policy and the economic outlook. Foreign investment remains significant and in the short term the markets are buffeted by changes in global economic outlook. Longer term the asset class looks attractive as it has the weight of a young and growing population and a transition from manufacturing to service industries. In 2020 Emerging Markets could be volatile as they are buffeted by short term global political events.
Bonds hit a low in 2019 as fears of a global recession rose and bond curves inverted. If central banks actions help global growth stabilise and western governments embark on spending programmes then bond yields could rise as investors become more confident. At the current levels it wouldn’t take a significant change in outlook to have an impact and therefore bond yields could be volatile in 2020.