Global growth in 2019 was the weakest in a decade, as rising U.S.-China trade tensions and other geopolitical concerns weighed heavily on manufacturing and export sectors. In contrast, the consumer sector remained a pillar of strength, propped up by strong labor markets with low unemployment and decent wage growth. This prompted a two-track global economy with service sector resilience juxtaposed against the struggling manufacturing sector. With global growth weak and inflation running below targets in many major economies, central banks shifted toward easing in a major way. In 2019, the global economy received more than 100 interest rate cuts by nearly 50 global central banks, which represented the largest cumulative easing since the financial crisis.
With rates already at, near, or below zero in many countries, the effectiveness of monetary policy may be muted, but the lagged impact of central bank easing in 2019 is likely to provide a boost in 2020, as global manufacturing indexes are showing signs of bottoming and recovery. Fiscal policy would be more effective in stimulating growth, in our view, but it remains politically difficult, as many major economies are already running high public deficits and debt-to-GDP ratios. Still, the odds are high for meaningful fiscal stimulus in select spots, including China and other large emerging markets, the UK, Japan and the Eurozone.
We expect a moderate improvement in global growth in 2020 rather than a strong rebound. Multiple factors should boost growth, including 2019’s broad-based monetary stimulus, fiscal stimulus in select regions, supportive financial conditions and reduced drag from the trade war and Brexit uncertainty. The result should be a bounce back in non-U.S. growth, while U.S. growth stays steady around its trend pace. We also believe a global or U.S. recession in 2020 is unlikely. Finally, we expect inflation to stay well-behaved in 2020 and inflation pressure to build very slowly.
Financial markets turned in a spectacular performance in 2019, and the macroeconomic environment in 2020 should continue to be supportive of risky assets. That said, 2019 will be a tough act to follow, and we expect global equity markets to deliver returns closer to their long-term historical averages. We expect interest rates to rise in 2020, as growth picks up, but the rise is likely to be contained as central banks stay dovish and secular forces remain disinflationary. Still, fixed income returns are likely to be much lower than we experienced in 2019, given an upward trajectory in rates and lower yields as a starting point.
4 market leadership changes for 2020
More important than the overall level of market returns may be the shifts we see in the performance of different market segments. More specifically, improved economic and earnings growth could spark an inflection point leading to a shift in market leadership that includes the following:
After a decade of underperformance, non-U.S. stocks could outperform U.S. stocks.
The U.S. dollar should weaken, and commodity price performance should improve.
Value stocks should beat growth stocks.
Cyclical stocks should outperform defensive stocks.
We see both upside and downside risks to our base case scenario. Risks related to the U.S. presidential election, the U.S.-China trade war and the potential for recession headline the downside risks.
On the flip side, stronger-than-expected growth and an abundance of liquidity could fuel late-cycle exuberance and generate financial market excesses. That might feel great for a time and produce outsized returns again in 2020, but it also might set the stage for a bigger and more painful payback period down the road.
For more details, read the full QMA 2020 Outlook and Review, which is available for financial professionals.
The views expressed herein are those of QMA at the time the comments were made and may not be reflective of its current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This commentary does not purport to provide any legal, tax, or accounting advice. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Each manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Certain information contained herein may constitute “forward-looking statements” (including observations about markets and industry and regulatory trends as of the original date of this document). Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making any decisions. No representation or warranty is made as to future performance or such forward-looking statements.
1030382-00001-00 Ed. 01/2020 For compliance use only