It was a bumpy ride in 2019, with trade wars heating up and a number of issues on the local front to deal with. Despite it all though, there were solid returns from equities, bonds and cash.
2020 is upon us, with many of the same issues still around, such as electricity shortages locally and a rising Budget deficit. Globally, trade wars remain a concern, but the path could be steered by US presidential elections, which takes place in November.
Once again, we’ve asked our panel of Investec Wealth & Investment strategists and other investment brains (from as far afield as Cape Town, Johannesburg, Zurich, and London) to answer questions about the outlook for the year. We hope their views provide important insights for the road ahead.
It must be borne in mind that these are all personal views of the individuals and do not purport to be our “house view”. Please consult our Global Investment View for the consolidated view of our Global Investment Strategy Group (GISG) and asset allocation team.
Many of those on our list are of course members of the GISG and asset allocation teams, where their broad range of ideas and opinions contribute to the overall risk score, commentary, and asset allocations of our different committees. The result is a well-distilled process that guides the way we manage your money.
Our panel is made up of the following:
- Annelise Peers (chief investment officer, Investec Wealth & Investment, Switzerland)
- Professor Brian Kantor (economist and strategist)
- John Wyn-Evans (head of investment strategy, Investec Wealth & Investment UK)
- Chris Holdsworth (chief investment strategist, Investec Wealth & Investment)
- Barry Shamley (portfolio manager)
- Bradley Seaward (portfolio manager)
- Oliver Kirkby (portfolio manager)
BK = Brian Kantor
JWE = John Wyn-Evans
BS = Barry Shamley
BSe = Bradley Seaward
CH = Chris Holdsworth
OK = Oliver Kirkby
Q&A January 2020
There are many different issues likely to shape the outlook in 2020, but let’s get straight to the big global one – who is going to win the US Presidential election? And, depending on your answer, will this be good or bad for financial markets from November 2020 onwards?
AP: At the moment Trump looks set to win this election, however, he started the Iran war talk a bit early in the year and if that drags on, he might lose support as the US public becomes wary of yet another long, drawn-out conflict.
Economic momentum seems to be slowing in the US and the stock market might drop going into the (northern hemisphere) summer. He will want it to show a rebound before he heads into the November elections.
The impeachment process might keep him on the back foot and it suits him to focus on Iran, though as stated previously it could cost him votes in the long run.
The Democratic candidate is important, but the issue is that Joe Biden is also quite old. For me, therefore, the election is Trump’s to lose.
CH: I suspect markets will not take it kindly should either Bernie Sanders or Elizabeth Warren win. However, I suspect that ultimately it will be a close-run thing between Trump and Biden.
JWE: Trump. I have no strong view on what happens thereafter though. He could go a bit nuts due to not having to face re-election in 2024, but he won’t want to destroy the family brand either.
OK: The odds favour Donald Trump. If he wins, we will see continued fiscal stimulus and low rates, which will be good for markets. If a left-leaning Democrat wins that will be bad for markets.
BK: Should Trump lose, a surprised share market will take it badly. The alternatives to Trump are not market or business-friendly – which is perhaps why they will not be elected.
BS: At this point, the polls have Trump in the lead, but if the Democrats rally behind a suitable candidate, we could see this shift.
BSE: Trump looks the most likely candidate to win the US election. While his nationalistic rhetoric has not been good for globalisation, his “Make America Great Again” campaign has followed through and has provided for continued US growth and low unemployment.
Experts from Investec Wealth & Investment were joined by political analyst Ralph Mathekga to discuss the global and local investment outlook for 2020.
Let’s maybe take a slightly different angle on this topic. Much as the result will affect markets, so too will the election campaigns. How do you see the Trump campaign (eg his rhetoric on trade and the Fed) affecting market sentiment? Conversely, how do you see markets responding to the Democrats’ campaign?
BS: I don’t attribute the past few years of equity market gains to the Trump presidency and my feeling is that the US equity rally is getting long in the tooth. Unless we have a far-left candidate coming to the fore in the US, I don’t anticipate much additional impact on equity markets other than the uncertainty factor running into election, which could push some investors to the sidelines.
I do think the S&P 500 has become somewhat overvalued, particularly relative to emerging markets. This has been justified given the earnings growth they have experienced until now. The key question is whether you are willing to pay the current valuation for future earnings, particularly when you compare this to emerging markets that are coming off a lower valuation and an improving earnings outlook as China recovers from the recent trade war with the US. Much will depend of course on what impact the coronavirus outbreak has on growth.
CH: Health stocks in the US have already been sensitive to the electoral prospects of Warren winning. If Trump wins again, I suspect the market will start to price in a trade dispute with Europe.
AP: Biden should not be a problem for the market if he wins. He is pragmatic but the Republican rally could stall because the Democrats do not support tax cuts. Either way, the low volatility environment that is also a result of US dollar strength should be coming to an end. To me, therefore, the run-up to the elections will bring increased volatility.
JWE: The Democrat campaign has the potential to be much more disruptive, especially if Sanders/Warren get the upper hand. Biden is the safe play for markets.
BK: As above – the Democratic campaigns move the party to the interventionist left. Trump has deregulated on an important scale – he has resisted reacting to climate change, which would have meant more regulation, higher taxes, and more expensive energy.
Notwithstanding the tactical approach that Trump adopts on trade, are higher tariffs now the new normal? And if so, what does this mean for the global growth trajectory over the medium term?
CH: I suspect not. Tariffs are costly for both countries and ultimately damage the long-term growth prospects of both countries. As a result, it seems likely that tariffs will be used as a short-term mechanism to lock in lower future non-tariff barriers to trade.
AP: The trade war should calm down since Trump has other fish to fry. However, trade wars are here to stay with the global rise in Chinese growth, power and reach. Will public rage make a difference in the short run? Unlikely. But China might open up if it continues on the road to reform. However, if these reforms lead to too much pain, the Chinese authorities might reverse some of them.
JWE: They will remain a political tool, with the US the aggressor in most cases. The dampening effect is probably priced in for the current moves, but long-term trade growth will be more subdued as a result. Some re-jigging of supply chains will also offer new relative opportunities.
OK: Tariffs are immaterial as a percentage of the world economy. Tariffs’ primary impact has been on confidence, which is now improving, as opposed to on spending power. I expect Trump will continue to use tariffs as a negotiating tool.
BK: I see higher tariffs, absent any free trading agreements of the US-Canada-Mexico kind. Europe will come under pressure to open up its trade to the US. Higher, even penal, tariffs on autos from Europe will be threatened. Europe is not a free trader with the rest of the world, especially when it comes to agricultural goods.
BS: I am not sure tariffs will be the norm if Trump doesn’t win a second term.
Coming back to China, how could the ongoing demonstrations in Hong Kong (already affecting growth in the territory) and the growing world outrage over China’s treatment of the Uighurs affect economic relations between China and the West?
BK: China is too powerful to be ignored and will not be easily influenced by outside opinion. China has been very restrained in its reaction to demonstrations in Hong Kong. China’s relationships with poorer countries, especially in Africa, is of interest. These interventions in Africa – building expensive bridges and railways, etc – may be something of a poisoned chalice. A bigger issue is whether Chinese growth can be maintained while the party exercises its despotic control.
CH: I can’t see it disrupting trade with China.
JWE: Probably not a lot more. It’s called Realpolitik. The Democrats are more likely to raise the volume on human rights abuses, however.
BS: There seems to have been a limited response in the past and I don’t expect this to change. The west seems to turn a blind eye unless there is an impact to its own physical or financial security. There may be comments expressing concern or outrage but I don’t expect any actual intervention.
We saw the doves stage something of a comeback at the world’s top central banks last year. Do you expect them to still hold sway in 2020? Or will this be the year when inflation rears its head and central banks start to hike?
AP: US inflation should remain subdued. Rising prices are starting to show, but we are still way below the target for the Fed. A further rate cut in the US is still possible. However, the German Bund yield has shown that inflation is picking up in core Europe, which implies that the previously easy monetary conditions will tighten in the region. This also supports my view that we have seen the top in the US dollar.
This is part of a cyclical upturn that will lead to tighter financial conditions, but we do not have run away inflationary pressures yet. European financial conditions will tighten as yields rise and the euro strengthens. At the same time, the US will need easier financial conditions into 2020.
CH: There are nascent signs of inflation picking up in the US. Inflation, median inflation, and median PCE inflation are all above 2%. Having said that, I doubt central banks will be aggressive in their response should inflation pick up. As a base case, we should rather rule out further cuts.
OK: Fed chief Jerome Powell publicly stated last year that he wouldn’t rescind insurance cuts if a trade deal was struck, as long as inflation was below target. The Fed is currently commenting on inflation being below target. I don’t think it will raise rates this year.
BK: Inflation seems set to remain subdued – and interest rates are likely to remain unusually depressed.
BS: Inflation in the US has been surprisingly well contained given the tight labour market. This could change quite quickly. I don’t see the same dynamics anywhere else globally at this point, but if the US is forced to change tack, it will make it very difficult for central bankers elsewhere who are faced with tepid growth.
BSE: I believe central banks will remain accommodative through 2020. If any rate hikes do come about, they are unlikely to be meaningful in quantum and would have limited impact on markets.
What does your answer imply for the different asset classes – equities, bonds, currencies and commodities (including gold!)?
BK: Low interest rates are helpful for equity valuations. They are a threat to government bonds issued by developed economy governments, who are likely to pick up their spending and reduce austerity in the light of the low costs of servicing debt. A weaker dollar would help emerging market equities and bonds and help lower policy determined rates set by emerging market central bankers, such as the SA Reserve Bank. I am not expecting any marked dollar weakness however, given decent US growth and interest rates in the US remaining on hold.
AP: I would be cautious on equity markets now as they seem to be overbought, but would look to use every sell-off to add to my equity holding. I am overweight Europe and will increase exposure to emerging markets once the market has sold off. For fixed interest, I am slightly short duration in the US and underweight duration in Europe.
A weaker US dollar is needed for gold to do better. The decline in US interest rates at a time when Europe has to tighten slightly will favour the euro versus the dollar.
However, China remains the growth catalyst for Europe and the rest of the world to allow them to outperform.
CH: Let’s look at each asset class:
- Equities – less support from the Fed, multiple are elevated and earnings growth is muted – mediocre return.
- Bonds – prospect of inflation, hence low returns.
- Currencies – rest of the world accelerates as the US slows, leading to US dollar weakness.
- Commodities – to benefit form US dollar weakness
- Gold – does poorly as real rates pick up in the US.
OK: I’m positive about equities, negative about long bonds, positive about cyclical currencies and commodities. This hasn’t played out yet but remains my base case view at the moment.
BS: Rising US rates with weak growth is a terrible cocktail. The impact of rising rates on the US dollar will ultimately determine everything else. A stronger US dollar will put pressure on all other global asset classes, in my opinion. This will create inflationary pressures in other economies who will have a tough time growing with higher rates.
BSE: I see equities performing well in a low interest-rate environment, with an emphasis on value. I also see a weaker dollar, as investors look for value outside of the US. I see a buoyant gold price as rates remain low and investors hold insurance assets into year-end elections.
Will this bizarre phenomenon of negative interest rates/yields unwind in 2020 or is it going to remain part of the fixed income world for some time? What are the implications for asset allocation?
BSE: Rates are likely to stay low for longer, however, the extreme levels of negative rates are likely to continue to abate. Unless inflation is expected to be more negative than the interest rate level, one would expect that investors/asset allocators would be forced to take on additional risk.
CH: I expect it to unwind. European growth is surprising on the upside and yields have already started to pick up. I suspect this will continue over the year.
JWE: Negative rates should continue in Japan, the EU, and Switzerland, but I’m not sure that anyone new will join the party, especially the Fed. There is too much evidence of negative side effects.
OK: I think yields will cyclically rise this year and then decline when growth expectations start to decline.
BK: Interest rates should stay low and, should there be decent earnings growth in 2020, this makes the case for being overweight equities in the developed world and for lower rates in the emerging market world. This may help emerging market equities and bonds to outperform.
BS: I think it will unwind at some point. If it happens in tandem with economic growth, then equities will be the main beneficiary. If not, gold will be the main beneficiary.
At the risk of saying we now have certainty on Brexit, what’s your take on the next steps in the process and what this means for the UK and European economies?
BS: I think the fact that we have more certainty is the most important factor. Brexit uncertainty has held back a lot of investment decision-making. I am optimistic about the outlook for the UK economy over the next five to 10 years.
CH: I see prolonged trade negotiations that act as an anchor on UK growth for the foreseeable future.
JWE: It’s still uncertain in terms of the details. The risk of “no deal” remains, but Boris Johnson has form in changing his mind. Some sort of deal is likely, even if very narrow.
BK: Boris will be good for the UK economy. Europe will carry on as before, with no growth breakthrough in sight. They will not help accelerate any agreement on trade etc, so are more likely to be disruptive.
BSE: Ultimately Brexit will be good for the UK over the long term. The UK should be free to negotiate its own terms of trade outside of the EU.
Which are the markets/geographies to watch in 2020? Developed or emerging markets?
JWE: Both! There is potential for an emerging market cyclical uplift, but negative structural forces need to be watched.
CH: Emerging markets. Should the US dollar weaken and commodity prices pick up, emerging markets will do very well. European stocks trade on attractive multiples and European growth is picking up. So a mix of Europe and emerging markets, in my view.
BK: As mentioned before, emerging market equities and bonds may well make a comeback, which is good for the JSE and the rand.
BS: I think the UK is a very exciting developed market to focus on. I am optimistic on emerging markets in general and given our above-average knowledge on the South African economy, it would still be my emerging market preference.
BSE: Emerging markets look like the value trade for the year ahead. However, underperforming developed markets in Europe are looking a little better and should not be discounted.
What are the sectors and themes to watch? Look at cyclicals vs defensive, growth vs value, offshore vs local, industrials vs resources, bonds vs equities, tech, or any other themes that are worth mentioning.
BK: Growth overvalue. Local may well do better than developed, in US dollar terms, if we have rand strength and lower interest rates.
CH: European banks – very neglected after a prolonged period of disappointment. However, European banking activity has been picking up and by one measure is the fastest growing sector in Europe at the moment. SA bonds – very cheap by global standards and fully discount the prospect of a downgrade.
BS: I am optimistic about emerging markets, value and the UK. I am also very excited about the ESG theme (see below).
2019 was a bit of a disappointment when it came to President Cyril Ramaphosa’s plans to fix the economy and rebuild investor confidence – is 2020 the year things change?
OK: I hope so. There is limited fiscal space.
CH: Eskom is likely to be a constraint on growth for at least the next 12 months. However, growth is likely to pick up off a low base.
BK: It’s time for action. Without it, Ramaphosa himself will be vulnerable. He needs to assert himself to hold off his rivals in the party.
BS: I think the pace of change leaves some people feeling like there hasn’t been much change, but the opposite is true. I think the President is moving methodically and perhaps cautiously but this is warranted, given how complicated many of these matters are.
At the same time, low inflation and slow growth could encourage further cuts in rates by the Reserve Bank. Could this be the spark the local economy needs?
CH: The Reserve Bank has repeatedly emphasised its caution. I don’t think we should be pencilling in more than one more cut over the coming 12 months.
OK: Lower rates (which are justified by low inflation) will be well received by the SA market.
BK: Lower rates will help stimulate some extra demand – but resolving structural issues (even an intention to do so) is important for building business confidence and capacity building.
BS: It’s exactly what we need and it seems like the Reserve Bank is finally seeing it the same way. We need a lot more than 0.25 percentage points though. Resurrecting growth is crucial.
BSE: South Africa needs a lot more than interest rate cuts to ignite growth. Structural reforms are essential. Finance Minister Tito Mboweni reiterated these views over the festive season.
How will developments at Eskom help or hinder South Africa’s growth in 2020? What are the scenarios?
CH: On the assumption that the requests for information are successful and deep maintenance is possible at Eskom, we should expect a gradual loosening of the restriction on growth. How it will be financed is an open question.
OK: I am cautiously optimistic about Andre De Ruyter’s management of Eskom.
BK: Keeping the lights on would be a helpful surprise. The economy cannot grow without secure energy.
BS: The positive of the problems at Eskom is that they could hasten the switch to renewables as financial institutions are far more willing to lend for green energy initiatives. The negative is the bottleneck that power disruptions create and the impact this has on growth.
Tell us about what you think could be the big surprises in markets in 2020, i.e. asset classes, sectors or geographies that could defy consensus, either on the upside or downside?
BS: A resurrection of activist investing could potentially lead to a switch away from passive funds. Passive investing has created noticeable distortions in pricing, particularly in small-cap vs large cap. Private equity is leading the way in South Africa, with a number of delistings in the small-cap space. Hopefully, this will create some interest amongst institutional asset advisers to look for more than an ETF or closet ETF tracker.
CH: Upside for EU banks. SA bonds rally. Iron ore rallies. Palladium rally ends.
JWE: I think it’s more likely there’ll be a negative surprise, with geopolitics more probably the source, not central banks.
BK: A rerating of S&P 500 earnings: the market has responded to improved earnings, not any rerating. This is despite lower interest (discount) rates that could have raised values.
We hear a lot about ESG (environment, society, governance) as an investment theme these days. Is this the year it comes of age?
BS: I think it will continue to grow for the next few years at a material pace. Companies that embrace ESG are companies that are generally thinking about the long-term sustainability of their business and are as a result better quality businesses. Because of this, they have outperformed in the past. This outperformance will create a self-fulfilling phenomenon, leading to greater acceptance by listed company management who will be compelled to move their businesses in line with best ESG practice or face a derating vs their peers who already have.
JWE: Yes, it will be huge. But beware of the “greenwashing” phenomenon (companies portraying themselves as more environmentally conscious than they really are) and fund managers jumping on the bandwagon.
OK: ESG will gradually be amalgamated into most investment businesses processes over time.
What are your “Grey Swan” events for 2020 – defined as events with a low probability but a big impact (black swans by definition cannot be assigned a probability at all)?
JWE: Coronavirus turns out to be much worse than currently expected. Michael Bloomberg wins the US election. US and China have a real fight with guns.
CH: Oil drops to $40/barrel as production growth from the US and Iraq continue.
OK: The outbreak of a global flu virus is a scary prospect. Bill Gates has been quoted as saying that “the world needs to prepare for pandemics in the same serious way it prepares for war".
BK: Iran becomes a normal society – and the Middle East benefits from this.
BS: A deterioration of the US-China relationship.
Lastly, let’s think about the next decade. Name at least one trend that is likely to drive markets in the next 10 years
CH: Demographics. The Chinese working-age population is declining by over two million people per year. Europe is aging rapidly. Healthcare is going to be a major sector of every emerging market economy going forward.
Automation. Rising productivity growth will see more employment growth rather than machines simply taking our jobs.
JWE: Demographics. Slowing population growth will depress growth. Long-term pension/healthcare liabilities will need to be addressed finally.
OK: If the Fed uses QE (which it has said it will do) to combat the next recession and US long bond rates hit 0%, that will be an interesting outcome.
BK: Cheaper energy – the result of innovation, wide application and abundant supplies of natural gas, (some from SA sources, such as Brulpadda, which itself is the result of improved technology). The ongoing trend – more produced from less input – will be very helpful for improved standards of living over the next 10 years, as it has been helpful over the past decade.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.
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