State Street Global Advisors, the asset management business of State Street Corporation. has this week published its 2020 Global Market Outlook, predicting recession will be avoided through a continuation of growth, subject to the global economy “sidestepping substantial risks” to maintain momentum.
“2020 is not a year of recession,” said Rick Lacaille, global chief investment officer at State Street Global Advisors. “We expect the global economic recovery to continue into 2020 against a backdrop of continued monetary easing, policy shifts and persistent pockets of resilience. Low inflation, robust consumer spending and a relatively strong global services sector combine to propel the cycle forwards. There are clear risk factors but overall, we expect world real GDP growth of 3.4 percent, up from our projection of 3.2% in 2019.”
State Street Global Advisors’ forecasts predict sufficient pillars of strength to carry global growth forwards. Investors can expect to find pockets of resilience and opportunity in this environment, despite a macro investment landscape that is expected to throw up significant challenges.
Risk factors increasingly prominent
Risks are expected to emerge on a number of fronts, notably increasing geopolitical tensions and lingering policy uncertainty. In this climate, choosing where to invest will matter, with focus falling on select risk assets. With this in mind, four key areas are likely to coalesce as key questions for investors:
Geopolitics: What will be the outcome with respect to Brexit, trade tensions, Iran, US impeachment proceedings, and more?
Economic resilience: Can consumers sustain strong spending without fundamental resolution?
Policy: Will the policy response extend beyond monetary intervention to include fiscal stimulus?
Structural reform: Will the pace of reform pick up in emerging markets and in Europe?
Positive outcomes in these areas would offer notable boosts to Europe and emerging markets even more than the US, which has less room for improvement.
Equities offer value in North America but risks arise in other territories
Into 2020, central bank support is expected to warrant an overweight position to equities, although this outlook may be tempered by increasingly stretched valuations, compounded by ongoing trade risk and persistent bouts of market volatility.
“Robust domestic demand and healthy consumer spending data lend weight to US equities, where recent monetary policy accommodation has increased risk appetite and reduced the risk of recession“, commented Lori Heinel, deputy global chief investment officer for State Street Global Advisors. “By contrast, European equities, while more attractively valued, remain vulnerable to persistent political and structural uncertainties. Shifts in fiscal policy and greater political clarity around Brexit, as well as movement on much needed structural reform, could unlock value in European equities.”
Long term growth potential in emerging market (EM) and Asia Pacific equities
“Despite current headwinds, over the longer term, value may be realized in EM equities, although investors may require a bit of patience”, said Kevin Anderson, head of investments in the Asia Pacific region at State Street Global Advisors. “Catalysts to value creation in emerging markets include a pickup in flows as the EM benchmark expands, modulation in US-China trade tensions and increasing allocation to EM by global funds, alongside improving fundamentals in domestic markets and longer-term GDP growth due to demographics and structural reforms. As we await those catalysts, it’s important to note that currently EM equity returns are relatively widely dispersed which suggests opportunity for careful stock selection.”
Volatility expected as lower rates in fixed income markets persist
Low rates in fixed income markets are widely anticipated. Rates outside of Europe and Japan offer a premium, but the level of premium has tripped lower in recent months, a trend that broadly looks set to continue into 2020. However, further factors may come into play, creating opportunities in this space. Accommodative monetary policy, including policy rate moves and potential ongoing quantitative easing should keep longer term rates anchored and support improved GDP growth.
This, in turn, should see a favourable backdrop for corporate issuers with stable ratings expected in this market. Corporate bond holders may also expect to see additional benefits through improved market technicals with issuances trending lower and ECB purchases likely to drive prices up. The risk of a less favorable economic outcome remains a risk and investors may wish to be discerning with their allocations to lower grade credit options.
Within EM, Chinese government bonds warrant particular consideration, as they offer both yield and diversification benefits, and their addition to the EM bond benchmark in 2020 is likely to result in substantial flows.
Currency and climate risk are key additional considerations
Geopolitical risks stand as key currency drivers in 2020. Ongoing Brexit uncertainties into the new year continue to generate risks for European investors. While volatility itself is relatively tame, investors should be wary of complacency – stretched valuations signal the potential for big moves ahead. The US dollar is expensive but is awaiting a catalyst for reversion, potentially presented in the form of a cessation of trade tensions.
Increasingly investors are focusing on longer-term thematic risk drivers, key among them being climate risk and the potential impact to company resilience. “We continue to view climate risk as a key consideration embedded into virtually all market segments and industries”, said Lacaille. “Climate change poses risks for financial markets as they attempt to digest climate’s impact on economic growth on society and on the global energy mix”.