- The first-half of 2020 will be marked by the evolving relationship between the US and China, while the US presidential election will define the second half.
- “Fortunately, investors have become much more realistic with their expectations of return and risk”
- Dwane sees attractive opportunities in high-yield fixed income, particularly in emerging market countries such as India and Indonesia, and higher yielding European equities.
The global economy will continue to slow in 2020, but the risk of a recession remains higher than priced into markets. This view is according to Neil Dwane, Global Strategist at Allianz Global Investors. Dwane sees several key factors shaping the market narrative in the year ahead, including the US-China trade war, the evolution of the economic cycle in the US and the positioning of central banks.
“We hope China will continue the process of transforming its economy and that its contribution at the global level will continue to be supportive. There will also be good forces driving the global economy from Indonesia and India, which are going through a different phase of their economic cycles and are engaged in major structural reforms. Europe can also surprise positively if policymakers manage to move the European Union (EU) in the right direction,” he explains.
In the UK, Dwane sees Brexit as one of the more important issues facing the greater EU in the coming year. “In most scenarios, we expect the UK to leave the EU at the end of January. We will see some fiscal stimulus from the UK, which may reduce the chances of a recession. This may allow the UK to contribute to global growth, which did not happen in 2019.”
Keys to 2020
Dwane sees central banks remaining relevant next year, maintaining their accommodative stance. “We may see interest rate cuts at central banks around the world,” he says. They will continue to support the global economy, but he warns that the real debate will be “to what extent monetary policy will continue to be useful.”
That is why he considers the return of fiscal spending to be one of the key economic drivers in 2020. “Investors should decide whether or not fiscal spending made by governments will be supportive of economic growth. Fiscal stimulus can lengthen the cycle, but what will be relevant is the breadth and scope of the stimulus. One of the conclusions I draw for 2020 is that both the UK and the US would likely not cut their interest rates to negative levels if they were forced to fight an economic recession.”
In the US, Dwane points out that a key factor will be the next presidential election at the beginning of November, but caveats that we are at a somewhat uncertain starting point. “We won't know what will happen between Democrats and Republicans until June 2020. We have several open fronts, the first of which is what happens with President Trump's impeachment. Secondly, there is the ongoing trade war with China, which has become something of a geopolitical tool for both sides.”
Dwane believes that the way to navigate this market, marked by a long period of low rates, is for investors to accept that “if they don't take risks, they won't get satisfactory returns.” In his view, fixed income investors have to think a lot about how to position their portfolios because the underlying assets often offer very little return or have a lot of risk. “Fortunately, investors have become much more realistic with their expectations of return and risk,” he says.
Dwane sees select opportunities in the high-yield market but reminds investors that they have to be aware of the risk they face. Leaving aside the opportunities offered by US Treasuries, which are often used to hedge other risk exposures, he prefers US and Asian high yield. "In the case of Asian assets, it should be remembered that they are more sensitive to economic cyclicality, and for emerging markets, it is better to focus on countries that are carrying out structural reforms such as India or Indonesia. On the other hand, we are more cautious toward Brazil, Mexico and Chile.”
Looking ahead, Dwane believes that if investors want attractive returns, they will have to allocate some of their portfolios to equities. That's why he says it's time to consider thematic investments that capitalize on “any trend that will work globally in the future.” Mr. Dwane highlights investments linked to sustainability, climate change, infrastructure, renewable energy, technology, artificial intelligence (AI) and robotics, as well as specific trends related to consumption and the tastes of younger generations, particularly millennials.