Global investment themes for 2020

Article #32 by Josef Cutajar - Published Monthly

As 2019 is coming to an end, various market participants would now be looking ahead for the start of the new year and examining the themes that are most likely to have the greatest impact on the performance of major asset classes over the next twelve months.

Undoubtedly, US international trade policy will remain at the top of the list shaping investor sentiment and global economic outlook. In this respect, although at the start of Q3 2019 US President Donald Trump seemed to take a conciliatory approach towards the possibility of striking a ‘Phase 1’ deal with China, the latest developments continue to highlight his unpredictable and impulsive character. At one point, the US President also suggested that any possible trade agreement with the world’s second largest economy could be postponed for after the US Presidential election which is scheduled to take place in early November 2020. Coupled with the latest new trade disputes with other important global economies such as Argentina, Brazil and France, it is very likely that trade tensions triggered by President Trump will continue to spill over throughout all of 2020.

In this context, the US Presidential election in the latter part of 2020 has broad implications that go beyond the ‘usual’ boundaries of international relations and geo-politics. The hard stance taken by Donald Trump over the past three years via his ‘America First’ slogan has already dented the foundations of the world’s trading system. Although Donald Trump is currently being investigated for impeachment proceedings, it is expected that these will, at some point, stall due to the lengthy procedures involved and the bi-partisan agreement which is necessary for Trump to be found guilty. At the same time, the over-crowded field of candidates within the Democratic Party for the presidential nomination is a source of intra-party fragmentation, thereby increasing the probability that Trump (who will presumably be the Republican nominee) wins another four-year term as US President.

Political developments in the UK, China and the Middle East are also likely to impinge on the performance of major asset classes in 2020.

In the UK, assuming that the Conservative Party obtains an absolute majority in Parliament in a crucial general election being held today, it is understood that the road to ‘Brexit’ will be a relatively smoother process compared to the endless twists and turns that took place in 2019. Nonetheless, there are still various uncertainties on the prospects for the British economy in the years ahead given that the UK still has to forge a trade agreement with the rest of the EU in the coming months apart from also possibly face another referendum regarding the independence of Scotland.

In China, the civil unrest in Hong Kong experienced in recent months is a cause for deep concern. Likewise, the geo-political situation in the Middle East remains extremely delicate and investors would need to keep a constant eye on this ‘hot’ region especially given its huge importance to the energy and commodity markets in general.

The other key investment theme that is likely to keep investors on edge in 2020 is the extent at which the “synchronized slowdown” (as coined by the IMF) in global economic output will either translate into an overall ‘soft landing’ or else deteriorate further and lead to contractions in some parts of the world.

In this respect, the EU seems to be the most vulnerable out of the world’s developed economies as the fragile dynamics of its underlying economy are also clogged by the disjointed political structure at supranational level. In fact, in a speech delivered last week, outgoing ECB Executive Board member Mr Benoît Cœuré described the single currency as yet “an unfinished agenda” and that “the euro area architecture is still not crisis-proof”. Mr Cœuré also stated that “the combination of weak potential growth and high debt is toxic in a monetary union with decentralised fiscal policy and insufficiently integrated financial markets”.

Against this background, overall macro-economic conditions in the euro area are not only likely to remain dependent on developments taking place across the rest of the world, but also conditional on the ‘extraordinary’ monetary policy stimulus measures of the ECB which are projected to remain at least at their present levels for a number of years to come.

In contrast, following the three interest rate cuts that the US Federal Reserve effected in 2019, the short-term outlook of monetary policy in the US seems to be relatively stable at this stage. In fact, an analysis of federal funds future contracts indicate that the Federal Reserve is expected to maintain its target range for federal funds rate at between its current level of 1.5% and 1.75% until the first half of 2020.

On the other hand, what may be interesting to monitor over the course of 2020 is the outcome of the Federal Reserve’s review of its strategy, tools and communication practices used in pursuing its dual mandate of maximum employment and price stability. Although this is not a theme that is now garnering much investor attention, the Federal Reserve’s assessment promises to introduce wide-ranging changes that could also have implications for other major central banks including the ECB. In fact, during her first hearing before the Committee on Economic and Monetary Affairs of the European Parliament, the new ECB President Ms Christine Lagarde noted that the central bank will “in the near future” roll out a review of its monetary policy strategy. In the case of the ECB, this has now become an urgent matter as it was back in 2003 that the central bank last did a similar exercise.

2020 is expected to be yet another eventful year characterised by a number of key political developments that have significant bearing on economic and financial matters including the performance of financial markets. Likewise, in Malta, amid the unprecedented events which took place in recent weeks, investors might need to re-examine certain positions to include a higher country risk. In this respect, however, it is very important to highlight the significance for market participants to avoid impulsive decisions and instead assess investments on the basis of company-specific strengths within the broader macro-economic environment.

2019 could well be put down in records as a year of significant and widespread financial market returns. However, the more important point to highlight is that although bouts of volatility are always intrinsically unpleasant and very difficult to predict, nonetheless they most often represent considerable opportunities to be exploited. In this respect, the final weeks of 2019 seem to be indicating that 2020 will not be different, thereby emphasising the need for market participants to be wary of current developments whilst always maintaining a long-term and disciplined approach to investing.

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