by Chris Lioutas
Insight Investment Consultants
It’s fair to say that 2019 was a bittersweet year, characterised by some of the highest political and economic risks we’ve seen in some time with the backdrop of some of the best investment returns we’ve seen in the last decade. Whilst we’re always thankful for those sorts of returns, though never planned or expected, it was a pretty uncomfortable experience. When we look at the magnitude of those returns versus rising political and economic risks, it’s hard to fathom just how we got to where we are now. It’s fair to say 2019 was all about persistence and staying the course. Whilst this year could be more of the same, as we come back from time away with our loved ones, we think 2020 is likely to be all about discipline and risk awareness.
Highlights for the year include
- Roaring asset price growth across the board, absent cash
- Phase 1 US-China trade deal
- US central bank acted appropriately by cutting rates and expanding their balance sheet
- RBA acted appropriately by cutting rates and preparing for balance sheet expansion
- Australian federal election result – positive for asset prices / investment markets
- UK election result
- Strong US labour market and retail spending
- Inflation remaining low
- Chinese government and central bank stimulus
- A falling US dollar towards the back end of the year
Lowlights for the year include
- US-China trade and technology war escalation
- US trade tariffs on other countries
- Brexit / UK politics debacle
- US-Iran conflict
- Tariff-induced weaker economic data globally
- German economy on the brink of recession
- Social unrest in Hong Kong, France, Chile, etc
- US immigration policy
- Rising Japan-South Korean tensions
- Stronger US dollar impacting emerging markets
- Continued Chinese economic growth slowdown
- Weaker Australian economy
For the sake of brevity, these lists are not exhaustive.
The key takeouts from 2019 are that US-China relations will never be the same again and central banks remain effective (for now) in maintaining investor confidence in their ability to patch the mistakes made by populist leaders and the structural deficiencies caused by still too high debt levels and worsening demographics.
What will 2020 bring?
Time will tell.
From an economic perspective, we don’t believe recession is likely in 2020 but economic growth locally and globally will remain weak. Weak enough to force central banks to remain supportive, but not weak enough to see recession fears rise. Closer to home, we think the RBA will be forced to cut rates another two times, and will seriously consider expanding their balance sheet (money printing) in the second half of 2020.
From a political perspective, we don’t think 2020 is any cleaner than 2019, with less UK political risk now being cancelled out by increased US political risk leading into the presidential election in November. As it stands right now, President Trump looks likely to serve a second term, which is probably the most supportive outcome from an investment market perspective.
Three likely scenarios for 2020 from a market perspective:
1. More of the bumper returns from 2019 as political risks subside and economic data improves but not markedly so to end central banks’ current pace of stimulus; or
2. A more benign environment were markets are range-bound through the course of the year as political risks continue to spill-over into economic risks which forces central banks to act even further quell a spill-over into markets; or
3. A capitulation in market sentiment driven by rising political risks, causing economic risks to spike, resulting in a loss of confidence in central banks’ ability to control the narrative and hence large falls in investment markets.
Following recent “wins” regarding a phase 1 trade deal and a more stable UK political environment, higher probabilities can be assigned to scenarios 1 and 2 above. However, we and many others, aren’t yet willing to rule out scenario 3. The concern we have is that the probabilities of each scenario are likely to be moving beasts, and it’s even possible we get all three regimes throughout 2020.
The four things we will be monitoring very closely in 2020 are US-China relations, the US presidential race, US central bank policy, and company earnings.
Hopefully we get enough time to act accordingly to major changes in each, or maybe minor changes in each mean staying the course proves the winning strategy yet again. Absent that, those that are well diversified, selective, and disciplined will weather 2020 much better than those that chase returns / income with little regard for the risks involved.