What lies ahead for the global economy and investment markets in 2020? As 2019 draws to a close, Brian Tora reflects on some of the key considerations for asset allocators and why maintaining the ability to react swiftly to change is likely to be important.
Let’s face it, 2019 has hardly been a dull year. Two deadlines for leaving the European Union have come and passed without an exit being achieved. We’ve had a change of Prime Minister without an election, but will be going to the polls in the run up to Christmas. Members of Parliament have been crossing the floor of the House in droves – some willingly, some less so. And the most controversial Commons Speaker for decades has decided to throw in the towel.
We’ve also seen of one of the most highly regarded fund managers implode with considerable and unwelcome publicity. Yet remarkably our economy has held up well, despite all the uncertainty, while shares have delivered positive returns. Between the start of the year and the end of October when the election was called, the FTSE 100 Share Index rose by nearly 8% – not a bad outcome, but one that underscores the international nature of the companies that go to make up this benchmark.
And speaking of the international scene, there has been quite a lot going on elsewhere in the world. President Trump remains the most unpredictable leader of the world’s largest economy we have ever seen. That said, US shares have seen a spectacular rise, reaching new high territory at the end of October, up by more than a fifth since the beginning of January this year. Of course, investor sentiment has been buoyed by three rate cuts from the Fed this year, a clear reversal of its earlier policy of tightening.
But we still have no resolution to the trade wars enveloping America and China which could still put a stop to global economic expansion. With the situation in the Middle East still balanced on a knife edge, 2019 feels like a year I will feel happy to see the back of, despite the overall positive outcome for investors – so far, that is. It is to 2020 we now need to look and try to determine how best to position portfolios in what could be another confusing year. Politics look set to play an important role in determining how markets behave.
The outcome of the General Election here will clearly have an influence on investor sentiment. Writing this, as I do, a full month before voting takes place, it is far too early to predict what the final result will be. Indeed, it may be hard to do so right up until the final whistle. What is clear is that there could well be some wild and unpredictable swings in individual constituencies. Much of the electorate has lost faith with those in Westminster who are supposed to represent them, so traditional support may be lacking. The polarisation of our nation may also play a part, with more tactical voting than usual.
Don’t forget, too, we have a Presidential election due in the United States at the end of the year. America seems to be suffering its own bout of polarisation, with the divide between supporters and detractors of Donald Trump as wide as ever. To say he has been a controversial President hardly does the past few years justice, but the fact is that the economy there is bubbling along nicely and shares were hitting new highs in the closing weeks of the year.
China will also be playing an important part in contributing to likely global economic wellbeing. That growth is slowing in the world’s second largest economy is clear, but it is still capable of delivering economic returns that Europe and North America can only dream of. Markets still believe an accommodation on trade will be reached. Indeed, it is not impossible that a breakthrough will have been achieved by the time you read this. But the world has become a trickier place in terms of trade, so determining where to back remains difficult.
What about fixed interest?
As for bond markets, with monetary easing back on the agenda for central banks, bonds no longer look quite as exposed as once they were. Even so, I find it hard to become too enthusiastic, given the low rates of interest enjoyed on much sovereign debt and the risks that are associated with corporate bonds. Perhaps the return of the yield gap in this country was inevitable – desirable, even, as the likelihood of company failure appears to have risen since the financial crisis of a decade ago. Bonds can be every bit as volatile as equities these days.
Personally, I remain nervous that any unexpected shock could be translated into a back peddling of investor sentiment that could see us move into bear territory. Probably the most vulnerable share market is that in the United States, where valuation levels leave little room for setbacks. Here in the UK markets appear more competitively priced. Bear in mind that shares on average are little more than 5% above the heights achieved twenty years ago. But nothing in the investment world is carved in stone, so a well-diversified approach and the ability to react swiftly to change should be the watchwords – as ever.
Brian Tora is a consultant to investment managers, JM Finn.