by Krishna Memani, Vice Chairman of Investments, Invesco
So, by now, I hope you have had your fill of predictions for 2020. As usual, they come in all shapes and sizes; however, there is a lot more consensus in this go-around than is usually the case. In addition to things that are likely to happen, I thought it would be equally interesting to list out the things that I believe are NOT likely to happen.
If some of these views simply sound like negative framing of predictions you’ve already heard, bear with me. There is only so much predicting I can do, and it might be easier to imagine what the future will bring by understanding what likely won’t happen next year.
1. We will NOT have a recession in 2020.
Given the momentum in the global economy and policy support from every large central bank in the world, a recession is out of the question, in my view. Enough said.
2. No recession, but the global economy still will NOT grow in line with its potential.
In my view, the reacceleration of the global economy that is already unfolding will end up being modest at best. While it is quite likely that growth in the developed markets (DM) gets close to potential, emerging markets (EM) growth will likely remain below potential. With growth in China and India slowing down and no significant fiscal moves planned, the growth contributions from other EM countries are just not enough for the global economy to reach its full potential. Furthermore, while DM growth may be better relative to potential economic growth, by the middle of the year, EM growth may start flattening out, even with a better outlook for DM. In my view, the only country with enough fiscal room to potentially turbo-charge global growth with stimulus is China, and they are not going to do it.
3. Global rates are NOT going to rise a lot.
Given this modest reacceleration outlook, I don’t see how real interest rates or inflation expectations can go up meaningfully. Furthermore, virtually every central bank has entered easing and/or balance sheet expansion mode. That means the front end of the yield curve in developed markets will likely remain anchored where it is now, but in emerging markets, the front end may drift lower. If those scenarios do play out, rate volatility will NOT go up much. And while the yield curves across these regions may maintain a steepening bias, they may not steepen enough to justify a negative carry steepening bet (which is simply a bet that longer-dated bonds in EM will fall more in price than the cost of shorting them)*.
4. We will NOT have a full resolution to the trade issues.
To state the obvious, the trade issues are too complex and too strategic to be resolved anytime soon. Furthermore, the so-called phase 1 deal is likely to be a one-off event for a quick fix that, in my view, is tantamount to putting lipstick on a pig. Having said that, I firmly believe that we don’t need the trade issues to be fully resolved. Instead, all we need is for them not to get exacerbated further, and I believe that could prove to be the case. If the trade tensions aren’t heightened, markets will likely do well as a result, but only modestly so. The trade conflict has been a manageable fiscal consolidation (felt mostly as a small tax increase for businesses and consumers) from an economic perspective but an utter disaster from a market and economic sentiment standpoint. Even if we can correct the decline in sentiment, trade will likely remain an issue for the foreseeable future.
5. Risk assets** are NOT going to have a spectacular year.
Don’t get me wrong: I expect markets to keep reaching new highs, and next year may indeed prove to be one of the lowest volatility years in a while. However, given that we are starting from a position of strength—in which markets are discounting a lot of the economic, rates policy and trade news—the upside may be limited to single-digit gains. That is probably a good thing. If the markets have a big year, the hawks at the central banks, who are dormant now, may reassert themselves on financial sustainability and asset price grounds, taking away the biggest tailwind for the market.
6. Value is NOT going to come back roaring.
As I have mentioned before, for the value factor to make a comeback, we have to see growth go above potential and interest rates move up a considerable amount from policy tightening. I think neither scenario is likely to play out anytime soon. While value has had a resurgence of late, I firmly believe that will peter out soon. Perhaps before 2019 is over.
7. The US dollar will NOT weaken significantly.
I think there is a good case to be made for dollar stabilization or modest weakening, given that the central banks have no new rate policies, global growth should rebound modestly, and the growth differentials between the US and other economies, in my view, favor international economies. But it is still difficult to make the case for meaningful dollar weakness. A weak dollar would require significantly better EM growth and a more meaningful resolution of the trade issues–both unlikely, in my view. So, international assets may do better in 2020, but we need to tame our expectations.
8. Credit defaults are NOT going to rise a lot.
Corporate credit growth has moved up for a few years, but it is still in the mid-single digits and significantly lower than the levels where credit markets have had problems. And even though overall debt levels are high, debt service—the near-term determinant of default rates—is at a good level. So, credit defaults are likely to pick up, but I don’t foresee an Armageddon. As a result, overall credit spreads*** should remain stable, but lower-rated credits and senior loans may deliver better returns, I think.
9. 2020 will NOT be a high volatility year.
Given my expectations for a modest pickup in growth, a continuation of current interest rate policy, an expansion of the central bank balance sheet, and a possible trade deal, I believe 2020, at least the first half, will not be a highly volatile year for the markets. That said, investors will keep fretting about the same issues they have throughout this whole cycle–the lack of growth and the economy’s dependence on policy support. That concern, though, is probably also a good thing because it may keep the upside in the markets under control. Like it or not, we need modest gains far more than spectacular performance from the markets to keep the policy hawks at bay.
Important Information
* A classic negative carry trade takes a long position in short bonds and short position in long bonds. That way the investor needs to make more money from the price appreciation of the trade than spent in carry by shorting a bond that yields more than the bond borrowed.
** A risk asset generally refers to assets that may have a higher degree of price volatility
*** Credit spreads are the difference between a US Treasury bond and another debt security of the same maturity but different credit quality
Blog header image: Wu Jianxiong / Unsplash
The opinions expressed are those of the author as of November 26, 2019, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
All investing involves risk, including the risk of loss.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Most senior loans are made to corporations with below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
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