The main events on the global stage in 2020
But while it may help reduce trade tensions, traditionally presidential elections add to uncertainty. Americans go to the polls on November 3 to elect all 435 seats in the House of Representatives, 35 of the 100 seats in the Senate – and the office of President of the United States.
Surveys show business investment tends to be low in pre-election years and 2020 is unlikely to be any different. The election and the ongoing trade war will loom over firms’ investment decisions – particularly if it looks like a far left Democrat candidate has a chance. Interestingly though the 2019 Australian and UK elections suggest that while electorates may be less keen on market-based policies than they used to be, they have not swung too far to the left.
In the September quarter of 2019, close to 80 per cent of company results beat expectations, ahead of the 10 year average of 75 per cent.
Absolute growth in profits slowed however, hit by the comparison with a strong 2018 which was buoyed by President Trump’s corporate tax cuts, leaving year on year corporate earnings growth the weakest since 2016.
Earnings are not likely to fall much further from here, but expectations are likely still a little too rosy, says Mousina.
“Market analysts in the US expect earnings to grow 10 per cent in 2020.
“However, recent profits downgrades – and risks to the US growth – mean these estimates are likely too optimistic”, she says.
“On our estimates earnings will be closer to 5-10 per cent in 2020, although there could be some upside from a weaker US dollar,” says Mousina6.
Oliver says the US dollar appears to have peaked7. The US dollar tends to rise on uncertainty and fall as confidence returns. The dollar fell against most currencies over the last few months of 2019 and looks likely to remain below its 2019 highs as global growth improves.
A lower US dollar lifts US company profits as 40 per cent of sales are from offshore.
Central banks have been easing decisively, partly offsetting the negative impacts of trade tensions and helping to prevent a further rapid worsening of the economic outlook. However, to date, other than a few countries, fiscal policy has been only marginally supportive, and not especially of investment”
- OECD, 2019
2020 could be a good year for global equities markets8. Europe and Japan are starting to show signs of a turnaround – which is often a good sign of global growth outside the US. The economies of Europe and Japan are more cyclical than in the US and depend on industries like manufacturing. The US is more service oriented.
Europe has suffered a slowdown partly due to drag from the German economy, which is heavily manufacturing and trade focused, but Brexit is fading as a threat.
“Brexit is a concern, but it’s not the same concern that it was three years ago,” says Oliver.
“Three years ago, we got worried about Brexit because there was this fear that if the UK left the EU then it would set off a domino effect of other countries leaving the EU and the Eurozone.
“But since then we’ve seen elections in Italy, France, Greece, Spain, Netherlands… and they’ve all… voted for parties that want to stay in.
“The level of support for the Euro remains pretty high."
Turn down the noise
Oliver offers some eternal principles to keep in mind in 2020.
Remember the power of compound interest, stay focused on the long term and don’t get thrown by the economic cycle, diversify, avoid selling after short-term downturns, beware of following the crowd at extremes, focus on understandable investments with sustainable cashflows – and seek advice.
But above all, turn down the noise.
“This is very important,” he says. “We get obsessed every time the market takes a tumble… down many billions of dollars.
“But we’re never told when the billions are put back on. And in the great scheme of things, I think most market gyrations are a non-event.
“We get obsessed over very trivial events.”
|The OECD view|
The OECD’s latest economic outlook9, released November 2019, downgrades forecasts for global growth as policy uncertainty and weak trade weigh on growth.
For 2020-21, the OECD estimates global economic growth of 3 per cent, well down from its own forecast a year earlier of 3.5 per cent. At 3 per cent, global growth would be the weakest since the global financial crisis.
Across the world, the OECD sees mixed performances depending on how exposed to trade each economy is. The US is seen slowing to a 2 per cent growth rate by 2021, while growth in Japan is tipped to be 0.7 per cent. Europe is forecast to grow 1.2 per cent, while Chinese growth is seen slowing to around 5.5 per cent.
The OECD urges governments to use fiscal policy to revive growth.
“Central banks have been easing decisively and timely, partly offsetting the negative impacts of trade tensions and helping to prevent a further rapid worsening of the economic outlook,” says the OECD.
“However, to date, other than a few countries, fiscal policy has been only marginally supportive, and not especially of investment.”
The OECD warns that climate change and digitalisation are ongoing structural changes affecting all economies. It also cautions that the trade wars mushrooming across the globe will continue to damage growth prospects. Fortunately most of these involve the US and for the reasons noted above, it is likely to want to tone them down a bit in 2020.
2 Dow Jones Industrial Average, https://en.wikipedia.org/wiki/Closing_milestones_of_the_Dow_Jones_Industrial_Average#2019_(15_record_closes)
3, 7, 8 https://www.ampcapital.com/au/en/insights-hub/articles/2019/november/five-reasons-why-i-am-not-so-fussed-about-the-global-outlook
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