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Edition 4 - Article 3

The main events on the global stage in 2020

All manner of global events are on the must-watch list for 2020, but there is also plenty of noise that is unlikely to have a notable impact.

Uncertainty was the watchword of the past few years, as slowing global growth over the last two years raised doubts about the longevity of the decade-long expansion since the global financial crisis.

Last year was characterised by rising risk – including the escalating trade war between the United States and China, the United Kingdom’s tortured Brexit negotiations, and in Australia a federal election which had the potential to rewrite tax policy.

But amid an environment of easing monetary policy, share markets went from strength to strength, with many recording double-digit percentage returns1, led by Wall Street. The Dow Jones Industrial Average closed at a record high 15 times during 20192.

Now, as we head into a new year, we take a look at what’s in store for 2020.

The global economy

AMP Capital’s chief economist, Dr Shane Oliver expects global economic growth to turn slightly higher in 2020 – up to 3.2 per cent from 3 per cent in 2019 – as easier monetary policy through 2019 kicks in to fuel the expansion3.

Oliver points to a number of signals indicating a pick-up in growth ahead.

Global business surveys show confidence has stabilised, bond yields are off their lows and trending up, the US yield curve inversion was short-lived, Europe, Japan and emerging markets shares are improving, cyclical shares are looking up and the US dollar appears to have peaked.

The key driver has been accommodative monetary policy over recent years – including quantitative easing and negative interest rates in some countries.

Eurozone unemployment is down to 7.5 per cent from 12 per cent in 2013, while US unemployment has fallen from 9 per cent in 2011 to 3.5 per cent at the end of 2019.

The question starting to be asked is how the world will be weaned off quantitative easing and whether that will affect economic growth.

“There is no easy answer,” says Oliver. “But there is no reason to believe that it will end with a calamity.

“We’re not seeing the same type of conditions for a deeper slide into global recession as we saw prior to the 2008-09 financial crisis such as overspending, surging inflation and excessive monetary tightening,” he says.

“If global growth does turn up in 2020 it would be good news for investors, because a renewed rise in global economic growth will boost profit growth and ultimately underpin further gains in share markets.”

Oliver says the signs of the end of a growth cycle for the global economy are not evident yet.

“The things that come late in the cycle – such as inflation, overheating, excessive investment – just aren’t present.

It looks to us that the recent slowdown we’ve seen in global growth is just another cycle extension – it delays the day of reckoning. Economic expansions don’t die of old age, they die of exhaustion. And I don’t think we’re at exhaustion just yet.”

- Shane Oliver, Chief Economist, AMP Capital

US-China trade war

The trade war between China and the US dominated headlines in 2019, but it may take a bit of a pause through 2020.

AMP Capital Senior Economist Diana Mousina notes that the US/China Phase One trade deal will see tariff hikes suspended – and others to be rolled back – but warns President Trump will maintain a “tough stance on China”.

Oliver believes the looming US presidential election could mark a turning point in the trade wars4.

“Donald Trump wants to get re-elected in less than a year’s time and history shows that presidents don’t get re-elected if they let the US economy go into recession,” he says.

“That’s very, very important which is why I think ultimately... he’ll try and quieten this issue down through much of 2020.”5

Oliver suggests China is also showing a renewed appetite for resolution. The Chinese economy is slowing and there is a risk that if Trump is re-elected he will prove a more formidable opponent in his second and final term.

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US election

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.

US markets

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

Global markets

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.

Important Notes

While every care has been taken in the preparation of these articles, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in them including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. Performance goals are merely goals. There is no guarantee that the strategy will achieve that level of performance. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. These articles have been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. They should not be construed as investment advice or investment recommendations. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Edition 4 - Article 4

One in a million

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