1Q 2020 | Guide to the Markets
Karen Ward, Chief Market Strategist, previews this quarter's themes and invites you to use the Guide to help navigate the investment landscape.
The key question for 2020 is whether geopolitical risk will subside and make way for a strong rebound in corporate investment (Guide to the Markets – UK pgs 16 and 27). We expect some pickup in activity in Q1, but are more sceptical about a V-shaped recovery, since geopolitical tensions – not least the US presidential election (pg 24) – are likely to keep businesses in ‘wait-and-see’ mode.
Both the Federal Reserve and the European Central Bank announced significant stimulus packages in 2019 and have now signalled a pause to allow their policies time to take effect (pgs 23 and 31). Our judgement is that their response will be asymmetric: activity would have to rebound substantially for talk of rate hikes to return, whereas a further deterioration would be likely to trigger a new wave of policy easing, sending bond yields ever lower (pg 71). Unless governments take over the baton and we see concerted fiscal stimulus, rates are likely to stay lower for ever longer.
The pressure on margins, which has squeezed corporate profits in 2019, is likely to persist in 2020 (pg 68). Disappointing earnings growth has not constrained equity prices, however, and valuations in most developed markets have become more stretched over the course of the year (pg 48). The monetary stimulus delivered in 2019 is a key factor behind multiples pushing higher and is likely to remain a support to markets, although a repeat of 2019’s performance looks unlikely.
There are material risks to this soft, but benign, outlook. An easing in geopolitical tensions that delivers a more robust economic bounce would be greeted very positively by markets, since central bank policy is likely to remain accommodative. In contrast, political events may generate volatility, and companies could respond to weakness in earnings with job cuts. Such large binary risks argue for a relatively neutral allocation, complemented by assets such as government bonds that can mitigate capital loss in the event of downside risks (pg 78), and those that are likely to perform most strongly should upside risks materialise, such as emerging market equities (pg 47).