2020 Global Market Outlook: Long Live the Late Cycle

2019: The Benefit of the Doubt

• Investors gave the market the benefit of the doubt as most if not all major risk assets showed strong positive returns in 2019 despite the recession fear in the middle of the year as well as continued uncertainty over trade tensions, Brexit and Hong Kong unrest. 
• Safe assets such as US Treasuries and gold also saw good performance in 2019. Therefore, for those investors who have stayed invested with a healthy and diversified portfolio as we had recommended should be rewarded with decent returns for the year.
• In dealing with a synchronised global slowdown, central banks across the world engaged in a synchronized monetary easing with the Fed cutting three times in 2019. Many governments also implemented fiscal expansionary policies. 
• Furthermore, political uncertainty has started to diminish since the start of 4Q 2019 in anticipation of an initial US-China trade deal and the significantly reduced risk of a no-deal Brexit. Leading indicators such as PMIs have stabilized as a result and earnings revisions have also begun bottoming out. 
• We expect the current late cycle to be extended, which should favour risk assets in 2020. 

2020: Riding the tide of a moderate recovery

·         Market has become risk-off amid the recent rise in US-Iran tensions with equities correcting while oil and gold climbing up. Previous experience of increased tensions in the Middle East suggests that the impact on markets could be “short-lived”. We still expect to see a moderate recovery in 2020.     

Key market drivers in 2020:

·         Recovery in economic and earnings growth – US is enjoying its longest economic expansion in history and the current global economic cycle is extending further. Although not all strategic trade issues between the US and China will be resolved any time soon, a truce or some ease in tensions will help a synchronized (though moderate) economic recovery globally in 2020, which will revive corporate earnings growth.

·         Monetary & fiscal policy support – Central banks have a dovish bias and are willing to ease monetary policy further if necessary. Lower rates and improving liquidity provide a strong cushion to the market. Also, with real yields staying lower for longer, demand for higher yielding/income investments such as Asian and EM bonds as well as structure products with coupon payment will remain high. Furthermore, more governments are likely to adopt fiscal policies to support their local economies, which will benefit the related sectors.

·         Moving away from cautious positioning – With receding political risks of trade war and Brexit, we turned which proved timely more bullish on equities gradually since October 2019 after a year of outflows. We believe there is still room for further upside amid attractive valuations for most equity markets (except for the US) and investor appetite for dividend yield. The US market traditionally trades at a premium, and we expect resilient consumer confidence. We are positive on US, Eurozone, UK and EM equities.

Diversification is still important

·         Despite our positive view on risk assets for 2020, volatility will return from time to time during the year. Hence, a diversified portfolio is still important, in particular in late cycle, with some defensive, alternative and safe assets which tend to have less/negative correlations with equities. We continue to favour short-end US Treasuries, gold, global macro and long/short equity strategies. Private equity and real estate are also good diversification tools.

10 Investment Themes 2020

Our 10 investment themes for 2020 include defensive, cyclical and mega trend investment ideas.

The first three themes are more defensive, offering solutions in lower volatility assets.

The fourth and fifth themes address opportunities in global trends such as deglobalisation and fiscal stimulus policies.

Themes six and seven are about transition towards a more socially-responsible world, with a focus on environmental issues and human capital.

The last three themes focus on structural trends such as ‘disruption’ innovation, digitalization of consumption and technological innovations in the health care sector.