Review 2019 - Preview 2020
by Mark Causer
………and like that, the decade came to an end.
Bushfires, a Royal Commission, Brexit, Trump v China and the Hong Kong turmoil - the year that was 2019. The global economy was rife with market changing events not limited to those mentioned.
It’s fair to say that 2019 was a bittersweet year, characterised by some of the highest political and economic risks we’ve seen in some time with the backdrop of some of the best investment returns we’ve seen in the last decade. Whilst we’re always thankful for those sorts of returns, though never planned or expected, it was a pretty uncomfortable experience. Unfortunately for many, the brightness of returns from investment markets was blackened out by some of the worst bushfires in living memory.
We wish all those impacted a speedy recovery.
When we look at the magnitude of those returns versus rising political and economic risks, it’s hard to fathom just how we got to where we are now. It’s fair to say 2019 was all about persistence and staying the course. Whilst this year could be more of the same, as we come back from time away with our loved ones, we think 2020 is likely to be all about discipline and risk awareness.
Highlights for the year included
Roaring asset price growth across the board, absent cash
Phase 1 US-China trade deal
US central bank acted appropriately by cutting rates and expanding their balance sheet
RBA acted appropriately by cutting rates and preparing for balance sheet expansion
Australian federal election result – positive for asset prices / investment markets
UK election result
Strong US labour market and retail spending
Inflation remaining low
Chinese government and central bank stimulus
A falling US dollar towards the back end of the year
Lowlights for the year included
US-China trade and technology war escalation
US trade tariffs on other countries
Brexit / UK politics debacle
Tariff-induced weaker economic data globally
German economy on the brink of recession
Social unrest in Hong Kong, France, Chile, etc
US immigration policy
Rising Japan-South Korean tensions
Stronger US dollar impacting emerging markets
Continued Chinese economic growth slowdown
Weaker Australian economy
For the sake of brevity, these lists are obviously not exhaustive.
The key takeouts from 2019 are that US-China relations will never be the same again and central banks remain effective (for now) in maintaining investor confidence in their ability to patch the mistakes made by populist leaders and the structural deficiencies caused by still too high debt levels and worsening demographics.
What will 2020 bring?
Time will tell.
From an economic perspective, we don’t believe recession is likely in 2020 but economic growth locally and globally will remain weak. Weak enough to force central banks to remain supportive, but not weak enough to see recession fears rise.
Closer to home, we think the RBA will be forced to cut rates another two times, and will seriously consider expanding their balance sheet (money printing) in the 2nd half of 2020.
From a political perspective, we don’t think 2020 is any cleaner than 2019, with less UK political risk now being cancelled out by increased US political risk leading into the presidential election in November. As it stands right now, President Trump looks likely to serve a 2nd term, which is probably the most supportive outcome from an investment market perspective.
From a market perspective, we think 3 scenarios are likely for 2020 –
more of the bumper returns from 2019 as political risks subside and economic data improves but not markedly so to end central banks’ current pace of stimulus; or
a more benign environment were markets are range-bound through the course of the year as political risks continue to spill-over into economic risks which forces central banks to act even further quell a spill-over into markets; or
a capitulation in market sentiment driven by rising political risks, causing economic risks to spike, resulting in a loss of confidence in central banks’ ability to control the narrative and hence large falls in investment markets.
Following recent “wins” regarding a phase 1 trade deal and a more stable UK political environment, higher probabilities can be assigned to scenarios 1 and 2 above. However, we and many others, aren’t yet willing to rule out scenario 3. The concern we have is that the probabilities of each scenario are likely to be moving beasts, and it's even possible we get all three regimes throughout 2020.
The four things we will be monitoring very closely in 2020 are US-China relations, the US presidential race, US central bank policy, and company earnings.
Hopefully we get enough time to act accordingly to major changes in each, or maybe minor changes in each, which means staying the course proves the winning strategy yet again. Absent that, those that are well diversified, selective, and disciplined will weather 2020 much better than those that chase returns / income with little regard for the risks involved.
We wish you all the very best in 2020.
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