As 2019 winds to a close, analysts have increasingly been turning their eyes to the not-so-far-off shores of 2020. Many banks have made something of a tradition of publishing high-level market outlooks that express their expectations, as well as offering reflections on the key drivers they foresee affecting markets in the year ahead.
On Nov. 19, Invesco Ltd. (IVZ, Financial) added its voice to the chorus of 2020 outlooks with the publication of a brief report titled, “What’s in Store for Global Markets in 2020?” The report offers a succinct analysis of the key forces that the company expects to dominate the year ahead, both positive and negative.
More monetary stimulus on the menu
According to Invesco, the biggest positive driver behind global markets will be a continuation of loose monetary policy by major central banks:
“Central banks are still shouldering the burden for stimulating the economy via monetary policy, as has been the case since the Global Financial Crisis. After a nascent attempt at normalizing, some major central banks have become more accommodative as 2019 has progressed. That should bode well for 2020, as the rate cuts enacted by the US Federal Reserve (Fed) in 2019 have already resulted in an acceleration in money and credit growth."
After brief flirtations with further monetary tightening in early 2019, monetary easing has returned in force. In the U.S., especially, the remarkable policy about-face by Federal Reserve Chair Jerome Powell has injected renewed enthusiasm into investors who had been fretting about the potential of a downturn.
Monetary stimulus will likely continue to serve as a tailwind for capital markets in 2020. However, Invesco was less confident in its ability to translate into broader economic stimulus:
“We believe such monetary easing should be more positively impactful for asset prices than the overall economy.”
That could prove problematic in the future, as potential economic malaise might not be sufficiently counteracted by monetary stimulus. Worryingly, this could result in capital markets becoming increasingly untethered from economic reality – the reality that theoretically governs stocks’ long-term behavior. Invesco foresees this causing trouble one day, but probably not next year.
Geopolitical uncertainty breeds market uncertainty
Even as monetary stimulus promises to offer a nice tailwind to markets in 2020, persistent geopolitical and geoeconomic issues are set to act as a counterbalance. According to Invesco, the disruptive effects from these tensions will likely serve to depress some economic activity that may eventually weigh on capital markets directly:
“Countering the positive effects of monetary stimulus is geopolitical disruption — and the economic policy uncertainty that comes with it...Economic uncertainty is likely to continue to depress capital spending, in our view, and we must watch vigilantly to ensure it doesn’t spill over into diminished hiring plans.”
Tensions over the persistent U.S.-China trade war, uncertainty over Brexit in the United Kingdom, the U.S. presidential election and flaring tensions in the Middle East may all serve to conspire against global capital market growth in 2020.
Invesco hopes that some of these overhangs, especially Brexit, will be resolved early in 2020. However, hopes for a quick resolution to the trade conflict, which is undoubtedly the most impactful of the disruptive forces set to unsettle markets in 2020, may be in vain. The Trump administration has presented a number of false dawns in recent months, but every time a breakthrough seems imminent, something conspires against it. Continued fear and uncertainty will likely weigh on companies’ capital investment choices. Moreover, Invesco foresees a bifurcation between manufacturing and service-related businesses in 2020, as the former continues to struggle most in a climate of trade uncertainty:
“The dichotomy between the manufacturing and service sectors of the economy continues, as we expect manufacturing to continue to experience weakness largely due to the trade wars. However, those economies with less exposure to manufacturing are likely to fare better in this environment, in our view.”
Verdict
2020 promises to be an eventful year for global capital markets. We are entering new territory as the long bull market and economic expansion continue to be supported by historically unprecedented levels of monetary stimulus. Meanwhile, geopolitical tensions are higher than they have been since the Cold War.Ă‚ Investors would be wise to move with caution in the new year.
Disclosure: No positions.
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