Global growth is near a point of positive inflection and recession fears should ease.
The easing in financial conditions, moderation in the drag on growth from the US-China ‘trade war’ and credit and policy-supported stabilisation of the Chinese economy should support a pick-up in global growth in 2020.
Several major emerging market economies are recovering from recession. The industrial and auto led-slowdown in Europe has troughed and rising employment and household income underpins continued trend growth in the US.
The forecast recovery is subdued compared to the rebound from the 2015-16 economic downturn and downside risks predominate.
The ‘phase one’ trade deal between the US-China is not yet agreed; an escalation in trade tensions between the US and EU still cannot be discounted; and political uncertainty remains elevated.
The global economy is characterised by low growth and high debt, rendering it vulnerable to adverse shocks.
Political uncertainty, social unrest and environmental risk will be reflected in greater dispersion and idiosyncratic risk, best captured, in our view, by bottom-up credit selection and from incorporating and monitoring ESG risks in investor portfolios.
The rising incidence of civil unrest in developed as well as emerging economies; technological disruption; nationalism over globalisation; and the demand from asset-owners for their investments to positively contribute to tackling climate change will be important themes for 2020 and beyond.
Mediocre growth and subdued inflation will keep central banks on hold but should be sufficiently positive to keep default rates low, creating an environment in which credit typically delivers relatively attractive risk-adjusted returns.
Ultra-low yields on core government debt, especially in Europe, renders investment-grade corporate credit the new ‘quasi-safe’ asset. But with dispersion and idiosyncratic risk on the rise, bottom-up credit selection in leveraged credit is even more important.
In the absence of bold political action, investors are trapped in an environment of ‘QE-infinity’ and persistently low to mediocre growth.
Yet the distortions from never-ending central bank liquidity and ultra-low interest rates are becoming systemic. Resources are captured by rising numbers of zombie companies surviving on easy financing, reinforcing the underlying problem of low growth.
A positive inflection in growth will support spread compression and a partial catch-up for assets and sectors that have underperformed over the last year.
Yield curves will bear steepen with central banks on hold; growth-sensitive cyclical assets should outperform, as will lower-quality credit.
The improvement in growth prospects beyond the US will support emerging market assets, notably local currencies and debt.