Market review: what 2020 may bring

Andrew Milligan

Aberdeen Standard Investments’ Head of Global Strategy, Andrew Milligan, looks at the challenges, trends and opportunities that 2020 may hold for investors.


What do you think the main challenges will be in 2020?

There’s a complicated mix of economics, populism and geo-politics for investors to navigate. 

Undoubtedly there are various economic concerns, including the high levels of debt of Chinese households and local governments, US corporates and some emerging market economies. Housing market stress in some developed economies, the risk of inflation because of tighter labour markets, and pressure on profits for small and mid-sized companies are also issues to be aware of. On balance though, we see these problems as manageable, even in a world of slow economic growth. The reason is that interest rates are low and credit is still readily available. 

Populism is another factor which will continue to have an impact on economic and fiscal policies in many countries. Voter anger has built up over several decades about slow income growth, government austerity policies and deteriorating job security. It won’t disappear quickly – indeed in 2020 it could be the source of more political shocks both in developed and emerging countries. Complex Brexit negotiations, early elections in Italy, tensions in Hong Kong and the Middle East, and US politics are just some potential examples. After the recent events in Iran, trends in oil prices will also matter a lot. 

The result of the US Presidential election is probably the most important of these as it could mean sizeable changes in policy especially around trade, technology and energy regulation, healthcare costs and the future relationship with China. We see any trade agreement between the US and China as simply a truce in a long-standing competition for world power status. Unfortunately though, the continued rivalry is likely to continue to dampen overall business confidence globally and encourage firms to move production from China to other countries.

What are the main investment themes and trends you think will appear in 2020?

The key question is whether the period of slow economic growth that we saw in 2019 is the precursor to a recession in any of the major regions. We still think that won’t happen, even if some leading indicators are flashing amber. Cost-cutting in the manufacturing sector doesn’t look enough to offset continued employment growth from services which support consumer spending.

In addition, the outlook for business investment and trade growth is slightly better than it was in 2019 – helped by the series of rate cuts seen in 2019. An interesting sector to keep an eye on would be telecoms, possibly seeing a more positive outlook as a result of developments in smartphones, semi-conductors and 5G networks. Trends in car sales around the world are also a useful quick guide on consumer confidence and spending. 

The outlook could appear rather better if fiscal policy – government spending and tax cuts - becomes more expansionary in 2020-21. Central bankers, such as the European Central Bank’s Christine Lagarde, are going the extra mile in warning about the relative ineffectiveness of current monetary policies, which have placed an emphasis on lowering interest rates and quantitative easing.

The good news is that there are already signs of public spending increases and tax cuts in China, parts of Europe, Japan and the UK. The immediate effect may be quite modest, as it takes time to boost infrastructure spending. However, together with a truce in trade tensions between the US and China, this would support consumer and corporate spending.

Where do you see the best investment opportunities in 2020?

Most bond and equity markets performed rather well in 2019, and we expect to see some of these continue to give attractive returns in 2020 and 2021. Although there will undoubtedly be periods of heightened volatility in markets in the coming year, we’ve seen global investors increase their exposure to equities in recent weeks, while bonds are benefitting from the desire for some income in a world of record low interest rates. 

Global equities remain the core of our portfolios, and future earnings growth determines our regional choice. For this reason, we favour US, Japanese and emerging market equities over European and UK equities. We also see real estate investment trusts (REITs) as a useful part of portfolios, as they have the potential to provide a balance of growth and income.

The choice of bond markets largely reflects valuations, as well as the political backdrop and the state of company balance sheets. On that basis, very few government bond markets look attractive to us, with the exception of a few such as Australia where there are opportunities for interest rate cuts. We prefer higher-yielding US and European corporate bonds, as well as emerging market bonds, which could be helped by any further rate cuts.

There wasn’t significant volatility in the major currencies during 2019, and we don’t expect much this year either. However, we do expect to see the value of the US dollar move moderately lower against some other currencies. This is partly due to the relative expansion of central bank balance sheets, and partly as rising investor confidence encourages more investment in non-US assets.

As always, we believe that having a well-diversified portfolio makes sense. The key decision for investors is what timescale they’re investing over. Just as in 2019, a mix of economic, corporate and political factors will create short-term buying and selling opportunities in 2020 for those who wish to be quite active in their decisions. 

Looking further ahead, there’s growing evidence that we’re in the late stages of the current investment cycle. This means that strategic or longer-term asset allocation decisions will become more important. For example, it might be wise to look for ‘quality’ assets - those that have a better chance of surviving an economic downturn or that provide reasonable returns despite pressures such as dividend cuts or bond defaults. So in 2020 investors should think carefully about their investment timescales.

The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on Aberdeen Standard Investments’ understanding in January 2020.