Familiar challenges will remain in 2020: uneven economic growth, trade disputes and geopolitical tensions. Investors must weigh these risks against the benefits of increasingly loose monetary policy, strong consumer activity, and the potential for a cease-fire in trade disputes during the US election season.

We expect the US economy to extend the longest expansion in history and China to successfully stabilise the economy, absent any material external shocks. The lagged impacts of global monetary easing should provide a tailwind for financial conditions and help boost economic activity.

While we don’t expect a pickup in business investment, the US consumer remains strong and should drive the US economy. The consumer has reduced leverage, seen strong employment and wage growth and benefited from rising asset prices. Globally, we expect inflation to remain muted and have lowered our expectations for inflation in emerging markets in our most recent portfolio review. Europe will be hoping for a speedy resolution to trade disputes to lift growth prospects as the ECB appears to be out of viable policy options. We find it unlikely that Europe will manage to embark on a meaningful quantitative easing program.

The political cycle will take centre stage in 2020. The biggest event next year is likely to be the US election although the Brexit crisis and European politics both get an honourable mention. We should also add local political disputes in China, Argentina and Venezuela into the mix. All of these political flashpoints have the potential to spill over to other economies and impact investor risk appetite.

Our portfolio positioning going into 2020 focuses on global developed market equities, short-maturity bonds, and credit. While stock markets globally continue to achieve all-time highs, we continue to focus on the fundamentals and remind ourselves that bull markets do not die of old age. As such, we expect global equities to deliver earnings growth near historical trend levels with emerging markets benefiting from possible weakness in the US dollar following the reversal in monetary policy (i.e. shift to cuts in interest rates from previous rises). We remain cautious on global government bonds and commodities, however.

During 2019, we reduced our exposure to longer dated sovereign bonds as trade concerned weighed on growth prospects and yields fell. Negative yields, especially in Europe, illustrate the extent of downbeat expectations for growth and inflation. We believe improvement in the economic outlook will lift longer dated yields, steepening their yield curves and leading to negative returns for investors in the period ahead. We prefer to hold fixed income exposure in emerging markets, which we believe provide diversification at attractive yields in higher growth, albeit slowing economies.

Important Information

This document is not a financial promotion and has been prepared for general information purposes only and the views expressed are those of the writer and may change over time. Unless otherwise stated, the source of information contained in this document is First State Investments, and is believed to be reliable and accurate.

References to “we” or “us” are references to First State Investments.

First State Investments recommends that investors seek independent financial and professional advice prior to making investment decisions.

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