Although signs of economic strain are popping up around the world and the trade war continues to unsettle financial markets, opportunities remain for investors.
Read our 2020 expextations for the asset classes.
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Here, we pose the five questions that we think investors should be asking as we head into 2020. We present the consensus view that should – in theory at least – be fully priced into today’s market valuations. And we challenge that conventional wisdom with the way we see the world: the Counterpoint view.
Question 1: WILL THE US ECONOMY KEEP EXPANDING?
CONVENTIONAL WISDOM: FOLLOWING THE LONGEST GROWTH CYCLE IN HISTORY, A RECESSION IS OVERDUE IN THE US
The US expansion marked its 10th anniversary on July 2, 2019, beating the previous record set from 1991 to 2001. In recent months, global economic data have been mixed and geopolitical issues, including ongoing trade tensions between the US and China, are worrying many economists and investors.
COUNTERPOINT: POWERED BY INNOVATION, ENTREPRENEURSHIP AND NEW TECHNOLOGY, THE US ECONOMY WILL CONTINUE TO EXPAND
The past decade of US economic expansion has helped heal some of the wounds inflicted by the 2007–2008 global financial crisis, and the economic situation remains, in many regards, very favorable. Household income has risen strongly, and asset prices have also surged, with investors enjoying strong capital returns in both equity and fixed-income markets. Today, US consumers remain confident, with plentiful job opportunities and the prospect of a more accommodative approach to fiscal policy (government spending and/or taxes) in a presidential election year.
Question 2: CAN EUROPE THRIVE?
CONVENTIONAL WISDOM: UNTIL IT FIXES DEEP STRUCTURAL ISSUES, EUROPE WILL FOLLOW IN JAPAN’S FOOTSTEPS
Many global investors believe Europe is experiencing its own version of “Japanification.” Economists use the term to describe Japan’s ongoing battle against deflation and anemic growth, which began in the late 1980s. This battle has been characterized by extraordinary but ineffective monetary stimulus, which has caused bond yields to fall as debt burdens increase.
COUNTERPOINT: THANKS TO THE DIVERSITY OF THE WORLD’S LARGEST FREE -TRADE AREA, THERE ARE INVESTMENT OPPORTUNITIES IN EUROPE
Europe’s economy has structural issues, but they are not the same as those that dogged Japanese growth in the 1990s and 2000s. Japan faces a greater challenge due to its aging population, while immigration in Europe creates a more flexible economy. To support recovery, Japanese companies needed to overcome challenges, including poor corporate governance and cross shareholding that are not common today. Europe has a market that is less capital intensive: 17% for Europe vs. 32% for Japan, based on assets/employee, net income/ assets and net income/capex.
Question 3: HOW IMPORTANT IS THE GLOBAL TRADE CONFLICT?
CONVENTIONAL WISDOM: THE US-CHINA TRADE WAR WILL CONTINUE TO TAKE A HUGE TOLL ON THE GLOBAL ECONOMY
Ongoing tensions between the US and China continue to make headlines. The trade war has been a significant driver of short-term market moves, and many commentators believe that it will be the most important factor for financial markets in 2020.
COUNTERPOINT: TRADE TARIFFS WILL HAVE THE BENEFIT OF ACCELERATING DOMESTIC STRUCTURAL CHANGE AND CORPORATE INNOVATION, DRIVING GROWTH IN THE LONGER TERM
Please do not misunderstand our central thinking: of course, the trade war between Presidents Trump and Xi is potentially a major risk to the world economy, and the rhetoric has without a doubt had a negative impact on manufacturing confidence across the globe. However, it is also important to note that, despite all the noise and the tweets, equity markets reached record highs during the course of 2019, and Chinese equities have never been as popular with foreign investors.
Question 4: CAN MONETARY POLICY SUPPORT GLOBAL GROWTH?
CONVENTIONAL WISDOM: CENTRAL BANKS HAVE RUN OUT OF OPTIONS TO PROP UP THE GLOBAL ECONOMY
When central bankers speak, markets tend to listen. With interest rates so low, central banks are running out of options for how to stimulate their economies. Centralbank independence is under threat around the world from populist politicians. In the US, President Trump is trying to influence the Fed more through his Twitter feed than via conventional economics.
COUNTERPOINT: FISCAL STIMULUS IS THE LAST CHANCE SALOON
ECB President Lagarde may decide to switch her focus to fiscal policy, cajoling governments to spend on infrastructure and, in particular, green technology.
Question 5: HOW WILL MARKETS REACT TO THE US PRESIDENTIALELECTION?
CONVENTIONAL WISDOM: THE RISE OF POPULIST CANDIDATES, ESPECIALLY ON THE LEFT, THREATENS MARKET STABILITY
Ever since the Brexit referendum in the UK and Donald Trump’s victory in the US presidential election in 2016, many political commentators have struggled to make sense of the shifting political paradigm. With the rise of anti-system parties right across Europe, the ongoing breakdown of centrist politics seems inevitable.
COUNTERPOINT: THE DEMOCRATIC RACE IS FAR FROM OVER, AND A MARKET-FRIENDLY CANDIDATE COULD COME OUT ON TOP
In today’s turbulent times, it is unwise to rely on opinion polls as the basis for political predictions. The US election outcome promises to be very close. The Democrats may win the popular vote against the highly likely Republican candidate, Donald Trump. Whether the Democrats make it to the White House will depend on their choice of candidate – a successful candidate would need to win swing states such as Michigan, Wisconsin, Pennsylvania and Florida by appealing to moderate Democrats at the same time as rallying key demographics.