Macro Matters – January 2020



World equity markets in calendar 2019 went through various mini cycles with periods of subdued investor confidence alternating with periods of renewed optimism. Over most of 2019, investors primarily focussed on two main concerns: the prospect of an economic disruption from an intensified tariff war between the U.S. and China, and a softer global macroeconomic outlook. There had also been a slew of other worries including slower Eurozone growth, Brexit negotiations, and geopolitical tensions in the Middle East. In other parts of the world, months of anti-government protests and demonstrations in Hong Kong pushed the territory into a slowdown. The European economy had a mixed year, but was supported in November by news that Germany, the Eurozone’s biggest economy, had narrowly avoided recession.


Global growth appears set to bottom out. However, we expect 2020 to be more a year of global growth consolidation than a full-fledged recovery, built on 1) a truce in US-China trade tensions; 2) a turn in the global tech cycle; 3) looser macro policies; and 4) a depreciating USD, which will help add to global liquidity and add to emerging market economies. We caution that the outlook remains very uncertain and appreciate the dangers of a re-escalation of US-China frictions, a worsening slowdown in China’s economy and a global credit crunch.


There are signs that previous policy loosening in the US is boosting activity there and several Emerging Markets – most notably India – are also set to experience a policy-fuelled revival. Some of the most reliable leading indicators of global activity support the view that a turning point is near. World trade volumes rose in October and the recent pick-up in export orders and the capacity utilisation of air freight bode well for early 2020. Meanwhile, although the global manufacturing PMI fell slightly in December, it still suggests that the contraction in world industrial production is coming to an end.

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.


The double-digit returns of 2019 will be hard to repeat is a phrase littering almost every investment outlook for global markets in 2020. Despite the trade war, political turmoil and more, virtually all major assets just posted a once-a-decade performance, and even uber-bulls know the chances of repeating the feat are slim.


We remain modestly overweight equity and credit due to the firming growth outlook and pricing that still looks reasonable against the macro backdrop. We 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.


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 U.S. Treasuries to other core government bonds, both in 2020 and in strategic portfolios. We like short maturities in the near term and inflation-linked bonds as resilience against risks of regime shifts.


Finally, 2020 could be a watershed year for monetary policy if the Fed and ECB decide to run their economies hotter than before; or, alternatively, if it becomes plain that monetary policy is on its last legs, 2020 could be the year that fiscal policy takes over as the main tool of global stimulus.


The Debt Bomb

Globally, debt—whether corporate debt, household debt, or national debt, whether in developed or developing economies—is at record-high levels, which is itself partly a product of the loose-money policy many central banks pursued to cushion trade and other shocks to the economy. That is itself a cause for concern, as those central banks, with interest rates already low, don’t have a lot of room to cut further to cushion any fresh debt shocks.

The world’s debt rose by $3 trillion in the first quarter of 2019 — an almost unprecedented borrowing binge that brought total global debt to $246.5 trillion.


And the debt pile is huge. The World Bank, in a special report, noted that global debt levels reached an all-time high of 230 percent of GDP in 2018 and have grown since. Debt growth is particularly alarming in emerging markets, the World Bank says, which hold about $50 trillion in debt, making them particularly vulnerable to any shock, whether a generalised slowdown, or more trade wars, or a financial markets correction stemming from either of the other two. Developing countries have already been through three debt crises—in the 1980s, the 1990s, and the 2000s—with hugely painful consequences. A fourth might be on the way, the World Bank warned, with similarly nasty implications: “The fourth wave looks more worrisome than the previous episodes in terms of the size, speed, and reach of debt accumulation” in emerging markets, the bank found.


The sheer amount of global debt means that any financial market correction—whether triggered by continued trade wars or corporate bankruptcies and defaults or something else—would have immediate impacts, especially on countries with few built-in shock absorbers.  “Renewed episodes of substantial financial market stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness,” the World Bank said.



Bond investors enjoyed strong returns in 2019. The steep drop in yields and declining credit spreads (the yield difference between corporate bonds and Treasuries of the same maturity) combined to boost returns in a wide range of fixed income asset classes. In 2020, we expect returns to be more subdued. From current levels, yields are likely to move modestly higher, while there isn’t much room for credit spreads to fall further. Consequently, we expect returns to be in line with the current income offered on bonds, while price gains are likely to be limited.  The 2019 year will be remembered as the year that turned bond-market logic on its head, yet ended with some hope that the worst of the negative-yield drama is over.


The global stock of debt with sub-zero yields has fallen to $11 trillion, the least since June, as a thaw in U.S.-China trade tensions brightens the world economic outlook. Earlier this year, a third of all investment-grade bonds—$17 trillion—had rates below 0%, meaning that buyers holding the securities to maturity are guaranteed to make a loss. Government bond yields across the globe are at seriously low levels – and have been for some time now.


Investors are paying closer attention to yields these days, however, because in many developed countries like Japan, Germany, France, and the Netherlands 10-year bond yields have turned negative. Even though government bonds of highly developed countries are considered “risk-free”, you’d still nominally lose money over a 10-year period (not to mention factoring in the purchasing power effects of inflation).


Buying 10-year government bonds in countries where the yield is still positive, such as in the U.S., U.K., or Australia, does not do an investor too much better. Here are the 10-year yields as of close on December,


  • United States: 1.198%
  • United Kingdom: 0.772%
  • Australia: 1.374%


Not exactly what we’d call ‘inspiring’ yields, and certainly not what investors would hope to receive in return for locking money up for 10 years.


The cause of the decline in global bond yields has a few sources, but it’s also difficult to pinpoint exactly where the pressure is coming from. In Germany, for instance, there is a short supply of government debt securities as the country is notoriously frugal and sports a low debt-to-GDP ratio. There are only $1.7 trillion of German government debt securities, compared to $16 trillion for the U.S. When demand for German ‘bunds’ drives up prices, yields fall.

Source: J.P. Morgan Asset Management; Bank of Japan, European Central Bank, FactSet, Reserve Bank of Australia, U.S. Federal Reserve Key Policy Rates


But the biggest factor in declining bond yields, I would argue, is low inflation expectations tied to the “muddle-through” GDP growth we’ve come to expect from the global economy in this expansion.


In 2020, the lagged impact of the Fed’s interest rate cuts, signs of stabilisation in the global economy, and a modest uptick in inflation expectations should provide a boost to bond yields. We don’t expect a big rise in economic growth, but even at a gross domestic product growth rate of about 2%, there is still room for bond yields to move modestly higher.


Inflation expectations need a boost

Inflation expectations are the key to higher yields on intermediate to long-term bonds. Various measures of inflation expectations have remained low despite a tight labour market, rising wages, and healthy consumer spending. The implied inflation rate embedded in the Treasury markets and survey-based measures like the University of Michigan Consumer Sentiment Index indicate investors and consumers expect inflation to remain persistently low. The 5-year/5-year inflation swap rate, a proxy for market-based inflation expectations, hit its lowest level since 2016 in mid-year, but has since rebounded to about 1.75%. However, actual readings of inflation are higher and rising. Looking at eight different inflation measures used by or created by the Federal Reserve, more than half are at or above the Fed’s 2% inflation target. With the economy showing resilience and core inflation edging higher, there is room for higher inflation expectations. By our estimates, a stronger growth outlook and rising inflation expectations could add as much as 50 to 75 basis points¹ to 10-year Treasury yields, bringing them up to the 2.25% to 2.50% level. Yields would still be low at those levels but would be more consistent with a moderate growth outlook.


Credit markets

The sharp drop in yields in 2019 led investors to reach for yield across the fixed income universe. As a result of this search for yield, valuations in the more aggressive segments of the fixed income markets have become stretched. Credit spreads have fallen to very low levels even as corporations have taken advantage of low yields to boost debt levels on their balance sheets. While borrowing when rates are very low is rational, the added debt burden raises the risk of downgrades and defaults if profit growth slows down. The risk is heightened for bonds in the lowest credit tiers, such as high yield bonds. Given rich valuations, we see higher risk of price volatility and even price declines. Income payments are likely to drive total returns for most corporate bond investments in 2020, and it’s unlikely that this year’s performance will be as strong as 2019’s total returns.


Treasury Inflation-Protected Securities (TIPS):

Markets don’t see inflation coming. Break-even inflation expectations inferred from the U.S. TIPS market remain below the Fed’s 2% inflation target and slightly lower than the VCMM long-term median levels.  This improves the attractiveness of inflation-linked bonds relative to nominal Treasuries, and we believe it could be a valuable inflation hedge for some institutions and investors sensitive to inflation risk. This is especially so because one of the unexpected outcomes of continued monetary (and potential fiscal) stimulus, coupled with a trade war, could be the surprise re-emergence of cyclical inflation This is not our base case but nonetheless presents TIPS as a good hedge in the event this risk scenario unfolds.


Strategy for the new year

  • Consider adding duration to fixed income portfolios if 10-year Treasury yields move up to the 2.25% to 2.50% region or as part of a long-term ladder strategy.
  • TIPS appear relatively attractive. Breakeven inflation rates are below long-term averages and the Fed’s 2% target, so the cost of inflation protection is relatively low.
  • Underweight high-yield bonds. The yield advantage that high-yield bonds offer relative to Treasuries is low, while corporate profits are likely to be challenged in 2020. Investment grade corporate bond investors should also move up in quality, focusing on bonds with “A” ratings or above.
  • Stay local. With low and negative yields across the globe, international bonds provide diversification benefits—but not much else.
  • Be realistic about returns. After outsized gains in 2019, returns for fixed income investors are likely to be more subdued in 2020.


Bonds to mitigate risk in a multi-asset portfolio

With economic growth and inflation staying even lower for longer and the markets almost addicted to lose monetary policy, we find it hard to see any material uptick in fixed income returns in the foreseeable future. Instead of viewing this asset class as a primary return generating investment, investors are encouraged to view bonds from a risk-mitigating perspective.


Listed Property

With interest rates at record lows and 10-year government bonds returning well under 1.5 per cent, A-REITs will again prove popular with investors chasing higher yields backed by secure rental income from mostly blue-chip tenants. The [A-REIT] yield spread to bonds – between 3 and 4 per cent – A-REITS [which traded on a dividend yield of 5.3 per cent in 2019 will appeal to investors seeking income. A year ago, investors were getting upwards of 3% for 10-year bond rates. It is now less than half that. We have had two cuts in two months and markets are expecting further cuts in coming months. The evidence is that rates are not going to go up in the short to medium term. While the economy is slowing, and that is why rates are falling, then the expected profits of industrial equities are going to become even more difficult to attain.


Over the past decade many Australian REITs have transformed themselves. Lessons learned from the 2008 financial crisis have led to improved capital management, with reduced gearing in what is an expanded fund management sector.


In 2019, the sector (as judged by the S&P/ASX 200 A-REIT index) delivered a 19.4 per cent total return (with a share price gain of 14 per cent), While we acknowledge that many REITs have solid business models… many are trading today at very toppy and hard-to-justify valuations.  Almost every trust is trading above its net asset value. The unit price to NTA ratio of two major property trusts – Mirvac and of Dexus – recently peaked at more than 1.3 times..


The trouble with that is if there was a sustained sell off in the market, generally the unit prices could fall by more than shares across the entire market. That has happened in the past. Moody’s has a “stable” 2020 outlook for A-REITS, which the rating agency says reflects modest net operating income growth expectations of around 3 per cent over the next 12-18 months.


One of the observations from 2019 was that unsolicited actions in the A-REIT space turned out to be difficult to execute. Another dynamic is the continued weight of private capital attracted to Australian real estate.  We are now observing a stabilisation of REIT security prices and the market adjusting to the new low interest rate environment which is conducive to M&A returning. Property acquirers are willing to do deals on record low internal rates of return as the property yield spread to bonds is highly attractive by global and historical standards. The cost of both debt and equity financing is extremely low and there is plenty of capital parked on the sidelines ready to be deployed.


Global players will continue to be active in the cash buyout space due to continued weakness in the Australian dollar and uncertainty prevailing in other investment markets such as the UK, US and Hong Kong.  An increasing amount of property sale and leasebacks from corporates is providing the local REITs with ample opportunities to acquire property and raise equity to finance the acquisitions. The current low cost of equity capital for REITs is also making it easier to use a higher proportion of equity in the acquisition funding mix.


The market pricing of REITs now is very supportive of raising equity. With over $6.5 billion of equity raised in the sector during 2019 across 25 separate deals not including block trades, there is clearly demand from investors for REIT product which provides a stable distribution yield well above the RBA cash rate.  On the IPO front, we think that there is pent-up demand for new listings in certain asset classes. For example, there are relatively few industrial REITs and no healthcare or hotel REITs in Australia.


Owners of property in these sectors can obtain very attractive pricing for assets from the IPO market with the bonus prospect of securities trading well above NTA in the aftermarket. Recent listings such as HomeCo and Investec Australia Property Fund have performed well, which bodes well for prospective listings. After the success of several recent demergers in Australia, we could see local REITs potentially spin-off retail portfolios which have been hard to sell on the direct market. Generally, corporate activity is commonly driven by mispricing of a particular stock or where synergies are readily achievable through scale-based mergers. Given the recent rally in many Real Estate Investment Trusts as a result of the lowering of the cash rate and the fall in the 10 year bond yield, mispricing is not a large feature of the market currently. The exception to this, of course, are the large cap retail sector specific REITs, being Scentre Group and Vicinity, which are both trading at discounts to net tangible assets due to the negative sentiment surrounding discretionary retail centres. M&A activity could be driven by some large-scale mergers where significant synergies can deliver value to shareholders. A-REITS have entered uncharted waters. This is not a short-term phenomenon, it is going to run for a long while on the back of lower-for-longer interest rates.


Australian Equities

Australia’s economy is passing through a very unusual time. Interest rates are at historic lows, the stock market is hitting record highs, yet wage growth remains flat and consumer spending is going in the wrong direction. Last year was fantastic for stocks – Australia’s benchmark ASX200-index returned 23% on average – but the broad consensus is that stocks will not be as strong in 2020.This is because future economic improvements on the back of low interest rates have already been priced in.  The broad market is only expected to deliver a return of between 5- 8% (including dividends).  That means investing in an index fund (a fund that passively tracks the performance of the stock market) won’t cut it for high-growth over the next 12 months as it did in 2019.


2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession. 2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.


GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, the only real issue is the extent of the acceleration. On balance, annual GDP growth is set to pick up to around 2.5 per cent by the middle of 2020 and is forecast to hit 3 per cent by year end. Contributors to the better economic performance include public sector spending, including on infrastructure, a moderate increase in business investment, an upturn in dwelling investment in the second half of the year and a moderate 2.5 per cent lift in household consumption aided by a positive wealth effect (house prices) and savings that are able to be deployed for spending. The risk favours GDP growth exceeding 3 per cent by year end.


Jobs market

The labour market is set to remain problematic in the first half of the year, hindered by the ongoing below trend growth rate and signs in the leading indicators for labour demand which are universally negative. As a result, annual employment growth is set to weaken to around 0.75 per cent in the first half, meaning average monthly job increases of around 10,000 only. The unemployment rate will be nearer 5.5 per cent than 5.0 per cent. As the economy improves through the year, the unemployment rate should start to head lower, perhaps a tick or two under 5 per cent by year end. With the unemployment rate stuck above 8 per cent, an acceleration in wages growth will remain elusive through the year.  Only when the unemployment and under employment rates fall below 5 per cent and 7.5 per cent, respectively, is it reasonable to expect wages growth to exceed 2.5 per cent.



Inflation will remain low for the bulk of the year, hindered by the soft economy. Only late in the year, if the economy performs as expected, it is likely to hit 2 per cent. For inflation to reach or exceed the mid-point of the target, GDP growth needs to exceed 3 per cent, with wages growth above 3.25 per cent for a sustained period.


Monetary policy and bond yields

The economic scenario means the RBA may cut interest rates one final time, early in the year, but even that cut below 0.75 per cent is by no means certain. Perhaps this final rate cut is after another low inflation reading. That said, signs the broader economy is improving will mean the RBA could be reluctant to cut further and by around the June quarter, it will (finally) have its broader view validated by more positive news, particularly in business investment and a bottoming in the dwelling investment cycle.


The chances of the RBA implementing some form of quantitative easing remain low.


The call on the bond market is more obvious – it would be no surprise to see 3-year yields get near 1.25 per cent, perhaps 1.5 per cent during the year. The 10-year is forecast to approach 2.0 per cent or more.



The Australian dollar

The Australian dollar has begun 2020 on a more positive tone, close to 0.70 cents. Expectations of a lift in global economic growth and improving domestic conditions are positive for the dollar. Throw in a scenario where interest rates will be edging up from current pricing, a large international trade surplus and ongoing buoyancy in commodity prices and the scene is set for AUD dollar gains. It is not unreasonable to expect the dollar to trade above 0.77 during the year, with more upside risks if the economy is sufficiently robust to see the market price in even modest interest rate increases.


House prices

The surprising recovery in house prices from the middle of 2019 will likely continue, although the power of the price rises will fade somewhat during the year. A nationwide price rise of 7.5 per cent for 2020 seems a cautious forecast with the bulk of the rises seen in the first part of the year. Of course, there will continue to be considerable divergences from city to city, town to town. Perth is poised to register a decent rise, perhaps 10 to 15 per cent as a shortage of dwellings becomes apparent and the mining sector looks to increase its investment spending. Sydney and Melbourne will likely register solid gains for the year of 6 to 8 per cent while Brisbane, Canberra and Adelaide will be more constrained. Hobart, having been a strong market in recent years, is likely to continue to do well – a tight market supply will be a boost for prices. I suspect the price surge will moderate in any event in late 2020.The Australian share market is currently valued on a forward consensus price earnings ratio of 16.5x, which is 13% above the long-term average of 14.6x. The forward consensus dividend yield for the Australian share market is an attractive 4.2% (80% franked) and this also continues to attract investors searching for yield, particularly given the very low interest rates that currently prevail.


All up, modestly positive domestic and global indicators should enable the Australian share market, as measured by the S&P/ASX 200, to reach our target of 7,200 by the end of calendar 2020, which is ~8% above the 31 December 2019 close of 6,684 (excluding dividends).


Global markets


Social Unrest Spills into Public Demonstrations

From Hong Kong to Chile, Lebanon to Colombia, protesters took to the streets in 2019. Mass demonstrations usually point to some degree of heightened political risk in each market, but it isn’t at all clear that the 2019 protests were motivated by a single, larger issue as, say, the Arab Spring uprisings were. Instead, most were motivated primarily by local management decisions.

In Hong Kong, by far the most dramatic protest, demonstrators took issue with a proposed law that would allow fugitives to be extradited to mainland China. In many ways, the law itself was a symbol of the concern that the mainland is encroaching too much on the autonomy to which Hong Kong has grown accustomed. The short-term investment impact was minor: The Hang Seng Index gained for the year despite the protests, as most of the companies in the index are now based in mainland China. While the tension between China and Hong Kong may have long-term ramifications for both places, as well as Hong Kong’s role as a global financial centre, it has little chance of spilling over to the asset class.


Income inequality played some role in protests that broke out in Chile, Lebanon, and Colombia, but dissatisfaction with public officials played an arguably greater role. Income inequality played the most explicit role in Chile’s protests, which began over a modest increase in public transportation fares. The country is one of the 20 most unequal in the world, and protesters expressed frustration about everything from privatisation of the country’s health and pension system to low wages.


In Lebanon and Colombia, however, protesters were at least equally concerned with governance as economic disparities. Colombia’s demonstrations began after a rumoured proposal to cut pensions, but unhappiness with the progress of the peace process with FARC guerrillas, alleged human rights abuses, and perceived corruption also stoked anger. Lebanese protesters took to the streets after new taxes were announced, but their frustrations also dealt with perceived corruption and electricity and water shortages.


The economies that have experienced protests are, apart from Brazil, relatively small. While continuing unrest may have an impact on local companies in the short term, their issues are disparate, and we expect their impact to be relatively contained in 2020.


Equity Performance

Global equity markets delivered a roller-coaster ride for investors over the past year as worries about trade disputes and slowing economic growth escalated. Even so, equities continued to deliver large gains. By late October, the S&P 500 Index hit new highs and most major equity benchmarks – both developed and emerging markets – were in positive territory for 2019.


Now the question is whether stocks can scale higher in 2020. We believe geopolitics could have an outsized influence on that answer, especially with the U.S. presidential election looming, Brexit still undecided and trade negotiations ongoing. But we also see positive offsets: the loosening of monetary policy by major central banks, the potential for fiscal stimulus and a strong labour market in the U.S. late in the business cycle, valuations for many equity indices now sit above long-term averages, but stocks look attractive relative to other asset classes, including bonds, where roughly US$13 trillion in government debt now carries negative yields. In short, Equities may have to climb another wall of worry in 2020.


In 2020, growth may depend on comprehensive trade deals and fiscal stimulus to reverse the slowdown in manufacturing and business investment. If tariffs are not lifted before businesses cut jobs, it may undermine the consumer spending supporting the world’s economy.


Manufacturing-focused economies, like Germany, are at the leading edge of the slowdown. This may lead to fiscal stimulus, with an increasing number of leaders already announcing new tax cuts and spending initiatives in their 2020 budgets. International stock valuations are below long-term averages, reflecting 2019’s lacklustre global growth and fears of potential weakness ahead. As international stocks tend to be more economically sensitive than U.S. stocks, they may offer more upside potential should growth reaccelerate.


Compared to the past 20 years, global stock markets are now less synchronised with each other, suggesting a globally diversified portfolio may provide effective management of market volatility.


Economic growth forecast: about 3%

Upside opportunities include:

  1. Progress toward a resolution of the US-China trade war.
  2. Significant fiscal stimulus from China or elsewhere.
  3. Clarification on a Brexit outcome.


Downside risks include:

  1. An escalation or spread of trade tensions.
  2. Greater geopolitical disruption that leads to military conflict, higher oil prices, and/or increased economic policy uncertainty.
  3. An increasing likelihood that trade wars could become currency wars — if the US attempts to weaken the US dollar and other countries react.
  4. Further gridlock on Brexit.


In our view, economic uncertainty is likely to continue to depress capital spending and we must watch vigilantly to ensure it doesn’t spill over into diminished hiring plans.  The dichotomy between the manufacturing and service sectors of the economy continues, as we expect manufacturing to continue to experience weakness largely due to the trade wars. However, those economies with less exposure to manufacturing are likely to fare better in this environment.




Economic growth forecast: about 2%

Upside opportunities include:

  1. Improving trade policy and lower policy uncertainty, which could boost business confidence.
  2. Corporate spending and investment.
  3. Industrial and manufacturing activity.


Downside risks include:

  1. Worsening trade policy and higher policy uncertainty, which could worsen all the above.
  2. The potential for the manufacturing sector to continue to experience weakness.
  3. The longer the uncertainty of the trade war persists, the more it is likely to weigh on business sentiment and erode business investment. The manufacturing component of the economy will likely suffer, although we expect the consumer to remain relatively strong given low unemployment. However, we will closely monitor employment and the health of the consumer.


U.S. economic growth in 2020 is forecast at about 2% and global growth at 3%, like average rates since 2010. In the United States, where consumption drives more than two-thirds of economic activity, consumers remain in good shape to continue supporting growth. Although consumer confidence remains high for the time being, we are also monitoring for further signs of weakness in manufacturing employment, particularly in states that are key to President Trump’s re-election bid.




Economic growth forecast: about 1%

Upside opportunities include:

  1. A resolution of the US-China trade war, which would likely boost Chinese and US demand, as well as German fiscal stimulus.
  2. Removal of tariffs targeting European goods.


Downside risks include:

  1. A further global demand slowdown.
  2. An unstable political environment leading to uncertainty and a no-deal Brexit, which could create a one-time shock to the system.
  3. We expect economic growth of about 1% or less in 2020. The economy has been negatively impacted by a lack of fiscal stimulus as well as the US-China trade war, and those factors are likely to be present in the coming year.


Europe’s economy appears to have stabilised after decelerating over the past year, and this benefited financial markets. The immediate risks remain the same – trade negotiations between China and the United States and the possibility of a disorderly Brexit. Both situations have been heavily researched and are probably well discounted in financial markets. We will watch them carefully because there is always the possibility that things will tilt in an unexpected direction.


The backdrop for corporate profitability remains good in general but growth is only available to companies that have international exposure or are less vulnerable to substantial technological disruption. Valuations in Europe look cheap relative to the United States, partly because large parts of the European index are in challenged industries or are composed of companies that are domestically focused.  Emergent risks are concerning but do not look enough at the current time to undermine the market’s trajectory. The key risks appear to be private-equity debt and the changing relationship between corporations and governments as evidenced by suggested changes to corporate-tax regimes and a renewed antitrust focus on large technology companies.


United Kingdom


Economic growth forecast: less than 1%

Upside opportunities include:

  1. A managed EU exit.
  2. A positive turn in the global economy.


Downside risks include:

  1. Rolling EU exit deadlines, which would extend policy uncertainty.
  2. Further deterioration in the global economy.

We expect the UK economy will grow at less than 1% in 2020. The economic policy uncertainty created by Brexit has depressed business investment and business confidence.


The UK has entered 2020 with its economy in “stagnation”, amid long-term uncertainty and rising business costs, according to a new report. The British Chambers of Commerce (BCC) said its research suggested “protracted weakness” across the economy, affecting firms in manufacturing and services. Britain is due to leave the bloc on January 31 at 11pm when it will then enter a standstill transition period which will come to an end in December. During that period the two sides will try to hammer out the terms of their future relationship. Boris Johnson has ruled out any extension to the transition period and believes a complete trade deal can be agreed by the end of the year. But EU chiefs do not believe there is enough time to agree everything by December, raising the prospect of the UK and Brussels going their separate ways with only a partial agreement in place.




Economic growth forecast: about 0.4%

Upside opportunities include:

  1. Improvement in global demand and the end of inventory adjustments, which should normalise industrial growth.
  2. A pick-up in investment demand in Asian economies (including demand for relocation), which could support capital goods exports and positively impact the Japanese economy.


Downside risks include:

  1. The possibility that growth in China’s capital goods demand stays low.
  2. A shrinking population, which has the potential to create severe labour shortage problems and pressure consumption.
  3. We expect the Japanese economy to stabilise 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. Our base case expectation for GDP growth in 2020 is approximately 0.4%.


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 the headwinds created by the new consumption tax. 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. However, if the yen does strengthen, we expect the BOJ to consider a variety of policy tools including additional purchases of equity exchange-traded funds (ETFs), if necessary. In addition, four other potential policy easing measures mentioned by Governor Haruhiko Kuroda include:

  • Cutting the short-term policy interest rate,
  • Lowering the target level of yields on 10-year Japanese government bonds,
  • Expanding asset purchases,
  • Accelerating the expansion of the monetary base.




Economic growth forecast: about 5.9%

Upside opportunities include:

  1. The possible issuance of specialty bonds to fund local government public infrastructure investments, which could provide impactful fiscal stimulus.
  2. The likelihood that capital controls, while threatened, will not actually be enacted by the US against China.


Downside risks include:

  1. An escalation in trade tensions between China and the US.
  2. A continued slowdown in manufacturing growth and related capex spending.
  3. High household and local government debt levels.
  4. A possible deceleration in household consumption, which tends to contribute to around two-thirds of the GDP growth.

Chinese economic growth has modestly decelerated, but we believe the fundamentals remain solid as the transition continues to a consumption, services-led economy. We expect GDP growth in 2020 to be approximately 5.8% to 6%, which is around consensus expectations.


China’s property market continues to be buoyant and is likely to see continued robust investment growth, in our view, which should be positive for the Chinese economy. We expect further softening of the renminbi heading into 2020 — but at a measured clip, which should also be supportive of economic growth. Other positive catalysts for the Chinese economy include fiscal stimulus measures that should boost fixed asset investments, and our expectation that there will be a stabilisation in the tariff wars.


In terms of the US-China trade war, we believe China will not make a deal to end the conflict if it requires any major concessions beyond narrowing the trade deficit. China appears willing to allow the trade war to continue rather than to agree to demands that it views as detrimental to the Chinese economy and its future strategic position. However, we remain positive on the Chinese economy because we believe China will utilize the fiscal and monetary tools necessary to support its economy despite headwinds created by the ongoing trade war.


Our expectations for the People’s Bank of China (PBOC) in 2020 include relatively modest monetary stimulus. The PBOC could continue loosening monetary policy with potential cuts to the required reserve ratio.


Emerging markets


Economic growth forecast: India: 5.5% to 6% / Asian EM: about 6.2% / European EM: about 2%


We believe the economy will benefit from significant fiscal and monetary stimulus over the course of the year. The Reserve Bank of India appears poised to provide further accommodation, and corporate tax cuts should be very stimulative, in our view. However, there are longer-term negative implications given that the true fiscal deficit is high and some of the impending fiscal stimulus could be financed by the Reserve Bank of India (profits, capital, dividends). In addition, financial sector reform and general structural reforms are still lagging.


Asian emerging markets

Growth in Asian emerging markets remains strong, although we expect it to modestly decelerate. We expect economic growth in 2020 to be approximately 6.2%, led by Indonesia and Vietnam, which have been benefiting from trade war supply chain disruptions. Small, open economies such as Hong Kong and Singapore could experience lacklustre economic growth.


European emerging markets

We expect more modest economic growth in European emerging markets in 2020 — approximately 2%. We expect Poland to experience solid growth, helped by structural reforms and solid domestic demand. (One downside risk is if elections produce a shock.) Meanwhile, we expect Turkey and Hungary to fare worse, as populist leaders in both countries face a hostile external economic environment. Turkey is too dependent on external financing, in our view, and Hungary is too dependent on German car manufacturing.


A rebound in EM growth in 2020 depends on a reversal of several factors seen in recent years, including global trade tensions, which brings downside risks. However, key EM Regions would also be dependent on policy responses globally, particularly in the US and China. Additionally, the multitude of street protests reported around the globe – particularly in Latin America and the Middle East and North Africa – increases the political risks in these regions.







As we look ahead, we expect that the interplay between market risk and economic growth will drive gold demand in 2020. We focus our attention to financial uncertainty and lower interest rates weakening in global economic growth gold price volatility. Over the long term, the price of the gold usually moves in the opposite direction to US interest rates. So, when times are good, there’s confidence in the economy and interest rates are increasing. Investors then don’t need gold.


But when uncertainty hangs over the US economy, and already low interest rates are cut further, investors look to gold for shelter. And that’s what happening now. The Federal Reserve, the US’s answer to the Bank of England, is creating a supportive environment for gold. From a strategic point of view, gold is a good hedge against inflation, a valuable benefit these days considering that I think we’re facing long term inflationary headwinds. Everyone says gold is a hedge against inflation, but it is a hedge against capital destruction. In these abnormal times, we see gold as a good store of value.



Oil prices will likely be boosted by the higher cuts in supply committed to by the Organization of the Petroleum Exporting Countries and its allies (OPEC+) and the envisaged rebound in global growth, particularly in EM. The oil price should peak in the first three months of 2020 at $67 per barrel before dampening as increased supply from non-OPEC producers hits the market. Brent should average $64.5 per barrel in 2020. However, there balanced risks to this outlook: on the upside, if the global recovery is synchronised, the boost to EM growth could be higher than envisaged raising demand. On the downside, we are assuming full compliance to quotas from OPEC in the first half of the year but expect marginally weaker compliance in the second half, owing to seasonal demand for OPEC crude and uncertainties over an extension of current quotas beyond June 2020






Sector 12 Month Forecast Economic and political predictions 2020





Trade tension relief boosts the market’s sentiment. The more progress in the US-China relationship, the higher chances the commodity-driven Australia will get economically stronger. Lately, US-Iran geopolitical risk has been fuelling the Australian dollar volatility. The tensions between Iran and the US were escalated by the US air strike ordered by Trump, which killed Iran’s most powerful military commander – General Qassem Soleimani. Important factors influencing the AUD/USD exchange rate include the Australia-United States trade relations, global oil and gold prices, US-China trade tensions among other global geopolitical risks.  UD/USD exchange rate in 2020 will be 0.6969 in the first half of 2020 and will reach 0.7000 by the end of 2020.





US$1,400/oz – US$1,500/oz


It remains to be seen if Fed officials will adjust the forward guidance at the next quarterly meeting in March when the central bank updates the Summary of Economic Projections (SEP), but the weakening outlook for global growth along with the lingering threat of a global trade war may keep the price of bullion afloat as market participants look for an alternative to fiat-currencies. In turn, the broader outlook for the price of gold remains constructive, with the reaction to the former-resistance zone around $1447 we may see the metal spend most of the first quarter consolidating above $1500/oz before moving

higher to peak at around $1625/oz later in the year.





WTIS US$54 -US$67


Base metal complex will benefit from easy money policy.



Global commodities face a potentially volatile 2020, given the combination of growth concerns, geopolitical tensions, climate change and inflationary pressures. While global growth — and with that demand for key cyclical commodities — remains weak, we see the supply side also facing multiple challenges due to social unrest and climate change.





This is a market for active stock-pickers.




The outlook for REITs in 2020 remains favourable. We expect modest economic growth and see few signs of recession on the horizon. Real estate markets enjoy low vacancy rates and a balance of new supply and growing demand, supporting rent growth and REIT earnings in the year ahead.  A continuation of low interest rates, reasonable consumer confidence, and corporate activity (M&A) will support the sector. The lower Australian dollar adds to the appeal for offshore investors.





Australian Equities


5932 – 7200

This is a market for active stock-pickers.




I believe the Australian equity market not only remains good absolute value but great relative value. Market valuation levels, at 17x price earnings ratio are above long run averages of around 15x but earnings quality is much better than average, corporate balance sheets are strong and with very low interest rates today’s valuation multiples are more than justified. A fully franked dividend yield of around 4% also makes it a very hard asset class to ignore. While I’m positive on the overall Australian equity market, stock selection as always will be crucial.  I continue to look for great companies at reasonable prices and tend to have less sector over-weights and under-weights preferring to back the best companies in each sector.





1% – 2.5%

An inflation-linked bond fund might be a good addition if looking for inflation protection.



Bond investors have enjoyed strong returns in 2019. … In 2020, we expect returns to be more subdued. From current levels, yields are likely to move modestly higher, while there isn’t much room for credit spreads to fall further.


Cash Rates


0.25% – 0.50%


Job surveys suggest employment growth will slow into 2020 and the unemployment rate may rise. Many bank economists, including Bill Evans from Westpac, are predicting the next RBA rate cut – to 0.5 per cent – will come in February 2020.


Global Markets



S&P 500

If we continue with the initial scenario, the S&P 500 will peak in the first quarter of 2020 at over 3600. At that time, support levels would be first at around 3000, then the second long-term support near 2500.


The price-to-earnings ratio for the S&P 500 is nearing a cycle high. However, the sharp decline in interest rates has left relative valuations at a level that has historically been associated with average 12-month forward stock gains of almost 13%.

Investor sentiment, used as a contrarian indicator at extremes, is at the opposite from late 2018. Many short-term measures show investor complacency and suggest stocks are vulnerable to unexpected bad news in the first quarter.





Buy European Index

UK – Preferred sector


Europe remains a place to selectively choose stocks. For that to change, we need to see financial-sector companies performing better, signs that the European Central Bank and fiscal policy will boost economic activity, and increased demand from emerging markets. The consumer is looking stronger, with wages rising and unemployment falling. The seeds of a European recovery are being sown, with Europeans having a little more money in their pocket.


The lifting of Brexit uncertainty and increased fiscal stimulus should support the U.K. economy in 2020. Both major parties in the 12 December general election are proposing pathways to Brexit resolution and the end of fiscal austerity.











Japan’s economy is suffering the after-effects of the consumption tax hike on October 1st and its exposure to the global manufacturing downturn. The uncertainty around the China/U.S. trade negotiations as well as Japan’s own tensions with South Korea have weighed on economic sentiment.


Easing trade tensions and an improvement in global manufacturing should support Japan’s economy, as will a boost to spending and tourism from hosting the 2020 Olympics. There is also speculation that Prime Minister Shinzo Abe’s administration will launch a sizeable fiscal stimulus.



Emerging markets


We like the value offered by emerging markets (EM) equities. Regional central banks are easing policy and EM markets likely will benefit from China stimulus. The smaller scale of the China stimulus, however, limits the upside for EM.


In our view, the balance of risks looks to be tilted in favour of EM, in terms of the trade conflict and potential dollar weakness. We see EM growth improving in 2020 as a function of monetary, and in certain cases fiscal, easing and there is scope for a moderate industrial cycle. Valuations are reasonable and earnings expectations for 2020 could be met.


On the other hand, the relationship between the US and China remains uncertain and Chinese economic growth remains soft. Furthermore, the global environment remains one of excess debt and secular stagnation, with underlying growth slow; and markets in general have had a strong year as a function of the pivot to policy easing. We also believe that the recovery in growth will be moderate. Hence, we are positive on the outlook for EM equities in 2020, albeit cautiously.








Chinese policy makers are balancing the short-term requirement for stimulus against the medium-term necessity to reduce leverage in the economy. The net result is that stimulus will likely be modest—enough to stabilise or provide a small boost to the Chinese economy, but smaller than the previous stimulus episodes in 2016 and 2012. Credit growth is unlikely to accelerate sharply, but the authorities have already reduced bank reserve requirements and cut policy rates. They are also likely to increase local government bond issuance to boost infrastructure spending. Gross domestic product (GDP) growth, however, is unlikely to rebound and should remain near 6%.




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