Markets Outlook 2020
Twenty-twenty hindsight is a wonderful thing. But as we look ahead to the year 2020, the future appears less certain than ever. Against a background of...
Markets outlook 2020
A year for political games?
The end of the teenage decade, here come the 20s
Twenty-twenty hindsight is a wonderful thing. But as we look ahead to the year 2020, the future appears less certain than ever. Against a background of continued political populism, shaky economic fundamentals, trade wars, and central bank ruminations, we now have the steady drumbeat of concerns around climate change and AI disruption to factor into our world view.
This year, for the first time as part of our Markets outlook, we ran a survey with investment experts inside BNY Mellon Investment Management. Responses came from 107 investment professionals across five investment firms, each with their own unique outlook and culture. Their views made for interesting reading.
Although no consensus was made as to the direction of markets and asset class opportunity, (see chapter 4 for full responses), political risk remains a dominant influence, according to 56% of respondents. A further 35.8% said monetary policy was key.
Elsewhere in this year’s publication, our chief economist and chief strategist discuss their top 10 risks and opportunities while 10 fund managers provide their take on how specific asset classes or themes could play out in the coming 12 months.
Looking ahead is never easy but we hope the views and opinions contained in this publication offer a roadmap of sorts for markets in 2020.
What are the chances?
10 events in 2020 that could be risks or opportunities
Watching for risks & opportunities
Shamik Dhar, chief economist, and Alicia Levine, chief strategist, BNY Mellon Investment Management, pick out the key risks and opportunities they believe could move markets in the next 12 months. Many of these events may not happen but if they do...
#1: Risk – The Fed holds fire
(10% probability of occurrence)
In the US, the consumer price index heats up. The US Federal Reserve now has the headroom to resist further interest rate cuts. Markets interpret this as a decoupling stance relative to other central banks. Rate hike expectations return as does a flight from risky assets (e.g. EM hard currency debt).
#2: Risk – China plays hardball with
The Hong Kong/US dollar peg – a bellwether for the health of the city state’s economy – comes under pressure after a crackdown on pro-democracy demonstrators. The One-Country, Two-Systems compromise withers on the vine and governments in Europe and the US impose sanctions. China loses its main entrepôt for international finance. Global supply chains falter. Global recession ensues.
#3: Risk – China stutters
(30% probability of occurrence)
Moribund domestic demand tips China’s economy into stagnation. Unemployment rises and unrest in Hong Kong intensifies as factories idle. Investors begin to ask the question: Is globalisation a busted flush?
Shamik Dhar, chief economist, BNY Mellon Investment Management
WATCH: Shamik and Emma Mogford, UK equity manager at Newton, discuss the UK election outcome.
#4: Risk – Middle East geopolitics
(5% probability of occurrence)
Iran and its proxies engage in further conflict with Israel and Saudi Arabia (and their respective proxies). Primary direct engagement follows, disrupting oil supplies and raising the risk of crossborder escalation and entanglement.
#5: Risk – Faltering free trade
(30% probability of occurrence)
EU subsidies for Airbus provide cover for the White House to open another front in its ongoing trade war. This time, the European auto sector is in the crosshairs. President Trump digs in to send a strong signal to China.
Fast facts on Airbus v Boeing
US$22bn: State aid received by Airbus from EU countries, according to a 2006 complaint filed with the WTO by Boeing.
US$23bn: State aid received by Boeing from the US, according to a counter claim filed with the WTO by Airbus.
Thirteen years and counting: Duration of the Boeing/Airbus feud, making it one of the world’s longest and costliest trade disputes.
#6: Risk/opportunity – No deal
(30% probability of occurrence)
A hard Brexit proves far less economically disruptive than feared. Sterling assets outperform on the back of a sharp fall in the currency.
Alicia Levine, chief strategist, BNY Mellon Investment Management
LISTEN: Some key US political dates investors should watch closely in 2020
#7: Opportunity/Risk – Presidential wrangling
(60% probability of occurrence)
The House impeaches. The Senate acquits. Election hype takes centre stage. Markets shrug off political machinations – up to the November result, after which, in the absence of radical or anti-business change, they are likely to plot a steady course.
The election cycle in the US is upon us but the important dates are not in November they are in February... the Iowa caucuses (3 Feb) are the first look at how the Democrats are ranking their candidates. Iowa doesn't always pick the nominee but it can tell you who it is not going be."
Alicia Levine, chief strategist, BNY Mellon Investment Management
#8: Risk/opportunity – Fiscal frolics
(20% probability of occurrence)
Germany unleashes the Sturm und Drang of a fully-fledged fiscal policy under prompting from ECB president and former French finance minister Christine Lagarde. Bund yields pop, global yields spike and the safety trade is unwound leading to losses in bond portfolios. The bull market lives!
#9: Opportunity – Trade war pause
(60% probability of occurrence)
Trump signs a trade deal with China before the US general election. Even though this is a ‘skinny’ deal, markets are so relieved that cyclicals rally. Banks outperform.
#10 Opportunity – Earnings surprise
(50% probability of occurrence)
US corporations surprise on the upside with reported earnings, after their overly cautious indications in their 2019 guidance. The US retains its place as the global economy’s leader of the pack.
Overall, market pricing continues to suggest the post-Global Financial Crisis regime remains in place - that bonds and equities will stay negatively correlated, acting as a natural hedge within portfolios.
Shamik Dhar, chief economist, BNY Mellon Investment Management
10 opportunities in 2020 – maybe
Does 2020 promise a fresh start or will it be another year of mixed messages?
Against a shifting macro backdrop with rising political risks, managers from across BNY Mellon Investment Management’s suite of investment firms pick some key opportunities they believe could materialise in the next 12 months as well as assess some potential hurdles.
1. Rising defence and security expenditure
In an uncertain world of rising populism and trade disputes, defence and security companies could gain from increased government spending, says Newton portfolio manager Emma Mogford.
The global rise in populism and protectionism could create new investment opportunities in areas such as defence and security and drive new demand for port and border infrastructure and components such as airport scanning equipment.
More widely, changing population dynamics shift the balance of power in the world and may also place new emphasis on security and defence. This comes at a time when defence spending has been at a relative cyclical low. While European defence spending, in particular, has been relatively low, there are signs some countries are looking to increase spending on defence. We do anticipate an increase as countries look to shore up their own borders and create jobs. Some signs of this are already evident, with French President Emmanuel Macron signing a new defence budget, setting a target of €295bn over seven years from 2019-2025, which will bring French defence spending to a level unseen for decades.
The UK has a thriving defence sector which could also benefit from a global pick up in defence spending and domestic spending on this front could be positively impacted by the outcome of Brexit. Last September the UK government pledged an extra £2.2bn of defence spending in 2020, which would also mean a real-term increase of 2.6% to ensure defence spending stays above the Nato target level of 2% of GDP.
2. Trade concerns could belie some positive prospects for emerging market debt
While a re-escalation in global trade concerns could affect emerging market (EM) economies in different ways, some positives may result, says Insight Investment head of emerging markets Colm McDonagh.
In 2020 investors will be looking for income in a world where we expect yields will still be low.
While 2019 was a strong year for EM fixed income mandates, driven in large part by the sustained rally in developed market bonds, it is not yet clear whether that same driver of return will be as meaningful in 2020, and careful management of duration by investors may be required depending on the extent to which a cyclical growth rebound takes hold.
The direction the US dollar takes next year will be interesting as this will have important implications for other global currencies and assets. At a macroeconomic level, the upcoming US presidential election may also hold unpredictable consequences for emerging markets. From a currency perspective, if the US and other markets such as China can resolve their differences on global trade in 2020, we may see a weakening of the US dollar that, in turn, might help buoy EM assets.
In terms of geographic markets and regions, Latin America will likely present a range of investment threats and opportunities in 2020. Argentina in particular could present some very interesting opportunities next year across both corporate debt and sovereign debt markets. The political situation within the country remains highly fluid and how the government deals with the ongoing financial crisis next year will be very important.
Outside LatAM, other emerging markets like South Africa and Turkey may see a lot more bond issuance in 2020, particularly on the corporate side. Issuance from the Middle East and Asia will continue to be high, offering a deeper and more differentiated investment universe than existed even five years ago.
3. Staying in tune? Music streaming & multi-asset
Newton multi-asset manager Paul Flood says opportunities in 2020 may be found in less obvious areas.
Despite much uncertainty we believe opportunities will be available for discerning investors able to take advantage of the volatility in capital markets that we expect to see in 2020.
In terms of key investment opportunities we have 'high hopes' for the music royalty sector. We see this as a pure play on music streaming, given the stable revenues it appears to provide, irrespective of the economic cycle. We also anticipate further growth in the music streaming industry.
Looking ahead, we expect this, renewables and other real assets to deliver attractive and stable returns through what we believe will be a volatile backdrop for equities and anaemic returns for bond markets on a longer term basis.
At a global economic level in 2020 we expect to see the European Central Bank and perhaps other central banks setting the scene for a move to more fiscal policy stimulus. We appear to be at a point where the impact of quantitative easing on financial markets has probably peaked and investors are starting to question the effectiveness of QE as a policy.
We also expect to see negative bond yields continue in 2020 and for markets to remain challenging.
The limited ability of bonds to deliver good diversification is a theme we believe is set to continue and many investors may question the value of their exposure to them in the years ahead.
4. Could growing ESG appetite fuel a green bond revolution?
The increasing importance of environmental, social and governance (ESG) facts could prove a boon for green bonds, says Insight head of European fixed income, Lucy Speake.
It is clear ‘responsible investing’ has moved from a ‘nice to have’ to a ‘must have’ for asset managers, reflecting underlying changes in our society. Incorporating environmental, social and governance (ESG) factors into credit processes can help identify and manage longer-term risks and tailor mandates to clients’ ESG requirements.
Regulations are also playing their part, a trend that started in Europe but is spreading globally, albeit unevenly.
Credit markets are starting to mark down those bonds that are seen to be in violation of the UN Global Compact. The trend for more green bond issuance will undoubtedly continue in 2020, as will bonds issued aligned to the UN Sustainable Development Goals (SDG). Indeed, we have already seen some deals with covenants established to increase the bond’s coupon if specific renewable energy goals are not achieved.
This may lead to companies with poor ESG scores to face a higher cost of funding, adding material incentives to improve behaviour. Responsible investing should not be limited to corporate debt and there is also a growing focus on integrating RI into emerging market and sovereign debt analysis.
5. Getting the message on telecoms
The fast moving world of telecommunications technology is creating major pockets of investment potential says Mellon senior portfolio manager, Jim Lydotes.
We believe legacy telecom infrastructure will become more opportunistic in the year ahead. Over the past decade, investors have put a very high multiple on pure telecom infrastructure assets - for example towers.
Some of the larger telecom tower companies trade at very high multiples because they’re viewed as natural monopolistic assets but there are a lot of legacy telecom operators out there that still own a lot of their assets and trade at very low multiples because the market hasn’t given them credit for these assets.
In Europe - each country had legacy monopoly telecom providers, which they didn’t monetize very well. Over the past five years, some of these behemoths have begun monetizing assets – in other words selling towers or fibre lines – and these are businesses that trade at incredibly low Ebitda multiples. A lot of them trade at 5x Ebitda but have assets they can sell for three times that, or 15x Ebitda.
Over the past 12 months, we’ve begun to see more signs that these companies are willing to monetise these assets. As we move towards a 5G world, there is more recognition these assets will be critical and the market may be willing to place higher multiples on them. We see this as a trend that’s only beginning and I think there’s a lot of room for that to continue to run.
6. Positive thinking on credit and high yield…
Investors look set to pay renewed attention to high yield debt, says Insight Investment senior portfolio manager high yield Uli Gerhard.
As long as the economic environment doesn’t deteriorate significantly, we believe that the expected easing cycle and historically low yields should prove supportive for credit markets in general into 2020.
Investors are likely to shift along the credit curve in search of higher yields and corporate issuers should be able to take advantage of this
demand to issue debt and refinance. Given this backdrop, we believe it is crucial to focus on individual companies and their paths to liquidity.
In 2020, some may view CCC-rated companies with some caution, as default rates could increase if the economy does slow. That said the year ahead looks relatively benign with regards to refinancing risk, with only 4% of the European high yield market needing to refinance 2019-2020 maturities – and it is less than 5% in the US.
Many companies have significantly termed out their capital structures, addressing their maturity stacks out to as far as 2024, thereby creating a potential liquidity runway should an economic slowdown take hold.
7. A look towards consumers for 2020 EM opportunities
Growth within EM consumer markets could offset the impacts of wider volatility in the months ahead, says Newton portfolio manager Naomi Waistell.
For 2020 the investment backdrop in emerging markets is likely to
remain unstable. However, on a relative basis, overall growth for some emerging markets is forecast to improve, owing to both low base effects, but more importantly, supportive reform agendas such as tax cuts in India and the long awaited final passing of a new pension reform bill in Brazil.
Looser central bank policy globally and less potential for dollar appreciation should also aid emerging market performance through 2020, reigniting their growth premium over developed markets. The new growth drivers in emerging markets are related to rising wealth effects, the size of the market opportunity (given the vast populations in China and India alone), with still low levels of penetration and monetisation, making this a compelling prospect for many investors. Due to this, we continue to believe the best long-term investment opportunities are within the consumer sectors, such as the internet, education or specific discretionary spending beneficiaries. Thematically supported areas such as this, with structural growth, are not immune from cyclicality, but tend to be far more defensive.
Recently, we have witnessed a significant de-rating, even for stocks with good growth prospects. We believe this bodes well for future emerging market equity performance as they appear cheap, not least for the high sustainable growth rates of a number of companies.
8. Why EVs could drive market change on the road ahead
The move away from the internal combustion engines to electric vehicles could spawn a host of business opportunities, says Mellon global investment strategist George Saffaye.
Electric vehicles (EVs) are here to stay. Opportunities across the EV landscape will come from the transition away from internal combustion engines to EVs, which is just at the cusp of this monumental transformation. As carmakers are launching many new EV models—they are no longer relegated to a niche segment of the industry. Most original equipment manufacturers (OEMs) are developing EVs and hundreds of start-up companies are seeking to join the ranks of auto manufacturers.
Government regulators are primarily driving the shift among carmakers, not necessarily consumer demand. In 2020, carmakers in Europe will need to meet increasingly stringent CO2 requirements, fueling the urgency to develop and manufacture EVs. That said, this trend is in its early stages and we believe companies including automobile OEMs, auto
component suppliers, technology companies (hardware and software), industrial and materials companies will offer investors the opportunity to benefit from the innovation/disruption across EV branding, attractive designs, in-vehicle technologies and distribution/service networks. The entire supply chain has attractive opportunities, whether in batteries (power source), wiring (more wiring and fiber optic than ICE vehicles), or cooling systems (batteries run very hot and must be cooled).
Battery manufacturers are racing to continually improve battery material content (phase out cobalt, for example, or move to solid state batteries), increase capacity, reduce the overall footprint, and improve recyclability.
9. Could gold shine in 2020?
The uncertainty wrought by rising Chinese debt and wider market leverage, upcoming US elections and other factors such as Brexit could play well for ‘safe haven’ assets and gold in particular in 2020, says Newton portfolio manager Suzanne Hutchins.
Continuing uncertainty surrounding political risk is inevitable for 2020. While there is still much focus on trade relations between China and the US, question marks over whether the global economy is decelerating or at best stabilising, the upcoming US presidential election and the
Looking ahead, perhaps the key to 2020 will be to try and understand and interpret shifting policy moves and their likely impact on investment markets in order to get ahead of the game.
Suzanne Hutchins, Real Return portfolio manager
ongoing Brexit saga in the UK add further to the fragility. However, we believe the real elephant in the room is China. The other area I am most concerned about is high yield credit.
We are in a period of transition, against a backdrop of uncertain monetary policy and shifts in central bank direction. There is a huge amount of leverage in the financial system and a lot of ‘zombie’ companies have kept in business through very cheap financing.
Despite these risks to the upside, there are opportunities to be found especially with the heightened volatility in markets and greater dispersion.
We strongly believe gold, which is often seen as a so-called ‘safe haven’ asset, is a robust real asset/ currency with the potential to do well in both inflationary and deflationary markets.
10. Is a new wave of fiscal stimulus on its way?
Ongoing macroeconomic uncertainty and the fading power of monetary policy could drive a switch to fiscal stimulus and potential opportunity, says Newton head of fixed income, Paul Brain.
Politics is going to be a key in 2020 and we expect the influence of populism and the ongoing debate over US/China trade tariffs to remain firmly on the agenda.
Overall, we believe geopolitical risk levels will be just as high in 2020 as they were in 2019.
Paul Brain, head of fixed income, Newton
On the economic front, a key mood shift looks likely on monetary policy across some markets as the underlying ability to manipulate or produce stronger economic growth appears to have faded. At the same time we look to be facing an economic slowdown, though we anticipate global markets will probably avoid a full blown recession in 2020.
In policy terms, we believe some economies are less likely to rely on central banks to turn things around in the year ahead.
While markets with the scope to cut interest rates – such as the US – have a degree of flexibility, other markets, like Europe and Japan, will most likely look to some form of fiscal stimulus if economic weakness persists. Depending where money is spent, fiscal stimulus has the potential to boost specific sectors and will benefit some, but not all, companies. We expect to see new opportunities emerge with the change of fiscal and monetary mix providing scope for currencies to diverge against each other. This, in turn could bring new opportunities for global bond investors able to take advantage of wider currency movements.
A road to nowhere?
BNY Mellon Investment Management sentiment survey
Moving sideways: will 2020 go nowhere?
The coming year could bring greater uncertainty for the global economy with markets moving sideways and political risk continuing its influential dominance. At least that’s the conclusion that could be drawn from the inaugural 2020 BNY Mellon Investment Management sentiment survey.
Investment professionals across five investment firms at BNY Mellon Investment Management (Alcentra, Insight, Mellon, Newton and Walter Scott) were almost exactly divided between a bullish and bearish outlook for the coming year. Of 107 respondents, 27.1% were bullish while 28% were bearish - with the remainder (43.9%) neutral.*
Matt Oomen, global head of distribution BNY Mellon Investment Management, comments: “Nothing highlights uncertainty more than asking a diverse group of people their opinion and getting no definitive answer.
“The investment firms that took part in the survey have five distinct and diverse cultures and outlooks and yet to some extent their views cancelled themselves out with neither bulls nor bears being the dominant voice. This is unusual and suggests we may be heading towards a crossroads of sorts as we move into 2020, creating a challenge for managers and investors aiming to thread a profitable path through the vagaries of markets.”
That said, when isolated by asset class - equities and fixed income - it is the bond managers/analysts that are more pessimistic on 2020's prospects. According to the survey 40.5% of fixed income respondents were bearish compared to just over 18% of the equity professionals.
Neutral responses remain the largest choice in both categories.
But even though many of the bond survey participants say they are bearish about the coming year, their pessimism is somewhat subdued.
Just 11% of bond respondents expect a global recession in the coming year, with 81% expecting a sideways move. This compares to the equity view with expectations where just 3% of the 63 participants believe a recession is possible in 2020 and 52% thinking a sideways move is probable.
When asked what they felt would exert the largest influences on asset class returns, more than half chose political risk, with 36% opting for monetary policy. Just under half of all participants chose the US as the expected cause of ongoing political risk while a quarter of respondents chose China.
Reasons cited for macro view
We have had a few years of rising equity markets, it is probably a time for correction however there are not many signs the global economy is slowing down.
From a pure equity perspective, China is also considered the second greatest area of political risk. When isolating just the equity responses from the 107 survey responses, 25.4% of the 64 participants chose China with a further 9.5% selecting the Middle East.
Despite this, the majority of the equity survey participants believe emerging market equities will offer good opportunities (52%) in the year ahead; only nine respondents singled out this area of investment as likely to pose negative returns or underperform. When asked to rank emerging market, developed equities, thematic equities, equity income, alternatives and absolute return, few were strongly optimistic, despite their overall bullish outlook.
Topping the predictions of "good" returns in 2020 was emerging markets (52%), followed by thematic equities (47%) and equity income strategies (47%).
When it came to developed market equities, the picture was mixed. While 6% believe developed market equities will perform very well, 43% of those equity professionals surveyed believe performance will be “good” in this area of the equity market; 38% forecast returns in this area would be static and 9% believe it will be negative.
Full survey: Political risk comments
Fixed income view
Developed market bonds come in for a similar treatment from the bond specialists surveyed. Just 17 of 43 bond participants thought returns from developed market sovereigns would be good or very good; a further 13 thought returns would be static.
The outlook for sovereign EMD was on par with developed markets - 11 thought returns in this area would be good or very good, 12 said they would likely be static. Among the fixed income survey participants, 32% thought developed sovereigns would make negative returns in 2020, while 34% said the same of EMD sovereigns.
Corporate debt was seen more favourably by the 43 fixed income survey participants, as was private debt and alternatives. Some 41% believe corporate bonds will fare well in the coming year, while 46% said returns from alternatives would be “good”; 35% said private debt returns would be good in 2020.
Again showing the wide ranging views for the year ahead, 24% (each) believe corporate debt and private debt will produce negative returns.
Geographically, the opportunities the fixed income investment professionals do see lie in US (48%) and Europe include UK (26%).
This, despite the fact that 61.9% of fixed income respondents believe political risk will have the largest influence on markets and that the US will be the greatest source of that risk (57%).
The 23-strong investment team at Dreyfus Cash Investment Strategies also responded to our survey, offering a team outlook of 2020. Ascribing their 2020 view as "neutral", the team believe the year will likely move sideways. The team believes North America offers the best opportunities in 2020 while the Middle East poses the largest political risk to markets.
* Please note, some of the figures, due to rounding, will not add up to 100%.
For 2020 investments, are you...
What do you think will pose the greatest risks to markets in 2020?
- Central bank policy
- Political risk
- Climate change
- Technology disruption
Will ESG factor more importantly in your investment decisions in 2020 than it did in 2019?
What asset class do you favour most for 2020?
- Emerging market equities
- Corporate debt
- Government bonds
- Emerging market debt
- Developed market equities
- Absolute return
- Private debt
Which region do you think will have the greatest opportunities?
- Europe ex UK
- Emerging markets
- North America
For Financial Professionals and Institutional Investors only
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