In our previous 2019 outlook we stated that visibility in global growth and interest rate trends was deteriorating as the rise of the US-China trade conflict disrupted positive trends in global economic growth.
Since then, the trade conflict and the accompanying deceleration of global economic growth has continued, and early 2019 witnessed the transition from an uptrend in global interest rates to a downtrend. Equity market volatility has remained high and 12-month rolling equity market returns have continued at a pace well below the preceding decade. Since late 2018, the yield on the 10-year US Treasury Note has fallen about 150 basis points, from around 3.25% to approximately 1.50%, while the US Federal Reserve reversed its rate-hike regime and began cutting short-term interest rates in response to slowing growth and falling inflation expectations. Further adding to these dark clouds gathering on the economic horizon is the “inversion” of the US yield curve. As of this writing, 10-year US treasury yields sit firmly (45 basis points) below 3-month US Treasury Bill rates, a condition that, if sustained for more than three months, has often preceded a US recession.
Further exacerbating the global economic deceleration in 2019 was the rise of the US dollar against most foreign currencies. The trade weighted US dollar index is up 4% over the past 12 months, putting an additional strain on the fast-growing emerging market economies that often borrow in US dollars. As geopolitical disruption rolls across the globe from Brexit to the US/China trade war to rising violence in the Middle East, the 2017-2018 surge in capital investment has come to a screeching halt and the world waits nervously to see if consumer spending and central bank accommodation can keep the global economy from slipping into recession. Domestically, US corporate profit growth is poised to continue its deceleration into early 2020. The lagged impact of the late 2015 to late 2018 Fed tightening cycle, lingering effect of a strong dollar, influence of slower order growth in the manufacturing sector, and inventory overhang argue for downward pressure on profit growth.
While this may seem like a lot of bad news, there are still rays of hope streaming through the dark clouds.
Even within the fog of geopolitical disruption, we are not, however, without a few convictions to guide portfolio positioning going into 2020.
We believe that the disruptions described above and the approach of the 2020 US Presidential election will contribute to higher sustained levels of volatility across the global equity markets. Presidential election years can be turbulent, as seen in 2000 and 2008 where the S&P 500 declined 38.5% and 10.1% respectively. The 2020 election related volatility may be further supported by a wide political divide and divergent potential outcomes for regulatory and tax policy. The debate over expanded governmental control of healthcare provides a pointed example of uncertainty. The election year politic is further overlaid by a greater focus on privacy, tax, and anti-trust concerns in the technology sector.
In contrast, the interest rate picture recently resolved into a more visible trend heading into 2020 as the Fed embarks on what the markets expect will be a series of interest rate cuts over the coming year. As such, locking in current rates before they fall further and managing the risk of future interest rate volatility has become a popular strategy with many clients.
These economic conditions may prove to be a bellwether for the ETF industry in 2020, as strategies that access rewarded factors and high-yielding debt continue to proliferate. Clients are seeking more ETFs that democratize fixed income investing, and the industry is prepared to support that need.
Bernhard Langer, CIO of Invesco Quantitative Strategies, outlines the benefits of systematic and factor investing approaches. Such approaches can include the use of systematic risk overlays that respond to market risks in a timely manner and thus help to protect clients’ assets.
Despite short term Covid-related risks, recent vaccine news provides valuable light at the end of the tunnel. Paul Jackson, Global Head of Asset Allocation, shares more insights.
Our investment teams from around the globe outline their expectations for 2021 to help investors plan for the coming year, wherever the markets take us.
