global perspectives
Global outlook: catch 2020
What are the main themes likely to drive the investment landscape in the coming year and beyond? In our outlook for 2020, we consider the central macroeconomic and sustainability steers that we expect to buffet markets, as well as considering the opportunities and risks identified by our investment specialists.
Macroeconomic variables: growth, risk, rates
From a macroeconomic perspective, we see a potential catch-22 situation arising as policy, economic and political dilemmas loop between each other. This could create a more complicated investment landscape for investors to assess.
Our base case assumes a shallow trajectory of global growth in 2020. We do not see a V-shaped recovery in global business investment (capex), despite the likely confirmation of a phase 1 trade deal between the US and China. Risks could emanate from a moderate recession and a potential hard landing over the coming 12 months, but we believe that the likelihood of such risks has fallen lately.
Political risk from elections is a key theme. The US presidential race is likely to tighten as 2020 unfolds, thereby shaping up to be a major risk for US assets, especially if Elizabeth Warren becomes the Democratic front-runner. In the UK, a Brexit deal is likely to pass in January, but another cliff edge Brexit scenario could approach in a year, in our view.
This backdrop creates an environment where real rates are expected to remain low and the European Central Bank delivers potential further easing. We foresee the search for yield strengthening as a major structural theme because meaningful fiscal easing remains elusive, especially in Europe.
Sustainability, central banks and responsible investing
We maintain our core conviction that sustainability will be the most signficant driver of returns. The transition to a sustainable economic model is already firmly under way, and we expect the transition to accelerate to the point where it fundamentally changes our investment universe.
In order to help our clients navigate this changing landscape, we consider a number of salient themes. For instance, climate change will be front and centre of the agenda for policymakers, in our view, and we see further central bank involvement in order to deal with the more extreme climate-driven events unfolding.
The landscape of sustainable finance is likely to continue bridging the gap to a decarbonized world. Sustainable finance has already grown more diverse in terms of issuers and geographies, and more complex in terms of instruments. Going forward, we see exponential growth in total assets invested according to responsible investment strategies, but highlight that a vast increase in investment levels is still required. Investors could indeed find that sustainability is a key driver of growth in a low-growth world.
Key investment views
In order address these themes, our investment specialists highlight how their asset classes are likely to be impacted. In equities, we see a potential comeback in European cyclical stocks, and highlight that sustainability could provide growth opportunities in a low growth world.
Yield enhancement is likely to remain a prominent focal point for fixed income in the year ahead due to the low rate environment. In corporate bonds, we remain constructive on quality corporate credit. Should volatility increase in equities and risk assets next year, we believe balanced, global convertible bond strategies would stand to benefit. In emerging market credit, we highlight attractive valuations in hard currency markets as part of a selective approach.
Turning to multi-asset portfolios, we favour risk-rebalancing and diversification, and advise actively managing drawdowns as correlation shocks become more frequent.
Trade policy, political risk, low rates and sustainability are likely to act as powerful crosscurrents in the months ahead. Sharing expertise is one way active managers can equip investors to navigate such waters.
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