Schroders upgrades 2020 global growth to 2.6% as economic cycle extends

03/12/2019
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HONG KONG – Schroders Chief Economist Keith Wade expects global growth to reach 2.6% in 2020 as the current expansion continues due to better prospects for US-China trade and lower US interest rates. A recession seems likely to be avoided as conditions that could potentially trigger a downturn is currently absent. He also upgraded the growth outlook for China and expects emerging economies to continue to gather pace whilst developed economies decelerate. Given the economic backdrop, Patrick Brenner, Head of Multi-asset Investments, Asia, believes taking long positions in selective equities, sovereign bonds, and credit could help investors capture return opportunities.

Keith Wade commented: “Our more optimistic view hinges on the fact that we now expect a "phase one" deal between the US and China. This would prompt global trade and capital investment to strengthen with activity improving in Europe and Japan, as well as in the US. In addition, benefits of lower interest rates are already reflected in household and business borrowings. Mortgage applications and housebuilding have also picked up sharply in the US housing market.”

“However, we should be mindful that a deal may not come through, as China has been pushing back against US tariffs and the 2020 US presidential election could also bring in uncertainty. These factors are likely to temper the near-term rebound in spending and investment by the business sector,” Wade added.

“We expect global inflation to remain relatively stable at 2.6% but likely to decline in the second half of 2020 as this year's slowdown in growth starts to have an impact. The fact that the rate of inflation is above the Federal Reserve’s (Fed) 2% target is not expected to cause a concern – the Fed has indicated that it will be prepared to tolerate an overshoot, and the lower and relatively stable oil prices appear unlikely to drive inflation higher. We think with this level of inflation, and growth below the long-term trend, the Fed could cut rates by 0.25% in April 2020,” Wade continued.

What can investors do in 2020?

Given the economic backdrop, Patrick Brenner, Head of Multi-asset Investments, Asia, believes taking long positions in selective equities, sovereign bonds, and credit could help investors capture return opportunities.

Patrick Brenner said: “Risk sentiment has improved given growing optimism over US-China trade talks and better-than-expected corporate earnings. Any further developments in trade talks could prompt a rebound in Asian assets, in particular Chinese equities and other export-oriented markets such as Korea and Taiwan, where valuations have remained relatively attractive. For fixed income, we expect most Asian central banks to maintain easing policies amid moderating growth. As such, the lower rate environment will remain supportive for Asian credit.  Overall, we continue to stress the importance of selectivity while maintaining our preference towards names with high quality and better value as the ongoing uncertainties remain an ‘overhang’ on the macro outlook.”

Brenner added: “Going forward, we believe equities will be driven more by multiple than by earnings, and in the US we favour the NASDAQ over the S&P500 as we expect the liquidity-driven rally should continue for the technology sector.”

“We also remain positive on selected government bonds such as US Treasuries 10-year, despite somewhat stretched valuations. Continuing evidence of weakness in the global manufacturing cycle and additional central bank liquidity should be supportive of sovereign bonds. Moreover, their hedge potential in periods of market stress is another benefit.”

Brenner added: “Valuations of high yield credit remain attractive. Despite concerns over fundamental quality, the technical picture is supportive as central banks ease liquidity conditions. We prefer US high yield credit over Europe due to the potential adverse impact of the rising leverage on earnings and costs. Additionally, less appealing valuations and weakening fundamentals in Europe will likely weigh on high yield credit.”

Protecting the downside

“Nonetheless, as we enter a new era of uncertainty, investors do need to further protect their downside and consider adding alternatives into their portfolios, such as gold which offers the diversification along with a falling opportunity cost. Also, dovish sentiments mean that gold will continue to be supported by the provision of liquidity from central banks,” Brenner concluded.

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