Outlook 2020

Outlook 2020: Multi-asset

Johanna Kyrklund

Johanna Kyrklund

Chief Investment Officer and Global Head of Multi-Asset Investment

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  • Global growth and US 10-year Treasury yield both to remain below 3%.
  • We expect single digit equity returns, with earnings potential stronger in markets outside the US.
  • We expect interest rates to remain low, which should keep a lid on market and economic volatility.

Earlier this year, the signal from our analytical models was that the world was entering the “slowdown” phase of the economic cycle. This normally signals danger for so-called “risk assets”, particularly shares, but we think this cycle is different.

The late stage of the economic cycle is usually problematic for shares because companies see their input costs (i.e. materials and labour) and their borrowing costs rising at the same time.

Central banks usually need to keep interest rates high to counter the effects of rising inflation. Meanwhile, labour costs (wages) rise as unemployment falls, and stronger growth means greater demand for materials. This environment normally weighs on company shares.

However, this time has been rather different. A notable lack of inflation has allowed central banks to cut rates more quickly to support growth. This has benefitted equities, even though corporate earnings have largely disappointed.

That said, we are still seeing costs rise in some areas.

Equity expectations

Looking to 2020, we believe equities are attractive relative to so-called safe havens, like government bonds, but earnings growth is required to deliver further gains.

We believe that the market’s expectations for US earnings may be optimistic –reflected in higher valuations - as profit margins are likely to be eroded by rising costs. There is the potential for earnings to exceed expectations in the rest of the world, however, leading us to expect high single-digit returns from equities (shares).

Our view on emerging markets, for example, has become more optimistic following an improvement in manufacturing surveys.

What’s in store for bonds?

We expect both global growth and the US 10-year Treasury yield to remain well below 3% in the coming year.

The liquidity provided by central banks, particularly the US Federal Reserve, has reduced the risk of recession, but lending by commercial banks remains subdued. We would need to see evidence of a pick-up on this front for there to be a more pronounced economic recovery.

Indeed, we are still more worried about growth disappointing than we are about inflation picking up. As a result, we still believe that government bonds are a potentially attractive hedge for multi-asset investors. An economic slowdown is typically bad for company profits and stock returns; government bonds tend to outperform in such periods.

We favour government bonds from the US over other countries because they offer positive yields. The US 10-year Treasury currently yields 1.78%, compared to -0.35% from the equivalent German Bund, for example. US Treasuries also have a higher sensitivity to economic risks; that is, they tend to outperform other bonds during a slowdown.

Another reason we think bond yields will remain suppressed is that pension funds continue to de-risk. This means they are reducing exposure to riskier assets such as equities in favour of more stable assets such as bonds that provide a yield. This demand for bonds stops yields from rising significantly. It also narrows the spread (the difference) between corporate and government bond yields.

Political risk remains

We think political risk is likely to remain a feature of the market environment, particularly in a world where growth is scarce and unequally distributed. A re-intensification of the trade tensions is the most significant risk as this could lead global growth to fall below 2%.

The impact of a more left-leaning US government would have a muted impact on our growth forecasts, but would impact the corporate earnings outlook in the US.

Fiscal policy (governments’ use of tax and spending measures) has been much-discussed among investors recently. Our view is that we expect a loosening of fiscal policy in the UK. But fiscal stimulus is waning in the US and the political will for significant fiscal easing in Germany seems to be absent. Overall, we put a low probability on there being a major expansion of fiscal policy globally in 2020.

All in all, the absence of a more emphatic global recovery prevents us from significantly rotating our investments. Low cash rates suppress economic and financial volatility and compel us to stay invested. We continue to tread a careful line between benefiting from the liquidity environment without exposing ourselves to too much economic risk.


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