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Outlook 2020 – the macro picture

After the world economy was fuelled with cheap money in 2019, the economic cycle should last well into 2020. Christian Gattiker, Head of Research, and Mark Matthews, Head of Research Asia, tell us about their expectations for 2020 and what to consider when positioning your portfolio for the year.

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As we enter 2020, what developments do you think we’ll see in the world economy this year?
Christian Gattiker:
Assuming that there are no exogenous shocks, we expect that the world economic cycle will reach a bottom in the first half of the year. There are a number of reasons for this. The stabilisation of leading indicators suggests that the manufacturing recession is fading. Although manufacturing is still contracting, a stabilisation in the US and the eurozone suggest that the worst could now be over. Furthermore, the economy should also be supported by the monetary support from central banks, improving economic sentiment, the fact that consumers are continuing to spend and resilient corporate earnings.

So you think the economy’s low will be in the first half of the year, but why isn’t your outlook even more optimistic?
Christian Gattiker:
Monetary easing by major central banks in 2019 should help to extend the global economic expansion into 2020, but further easing from here is limited. We would be more optimistic if we expected significant government spending, and while we do see the potential for fiscal spending to support the economy, especially in Europe, overall we expect policymakers will be hesitant.

What are the prospects for the Chinese economy in your view?
Mark Matthews:
Over the past two decades, the Chinese economy has grown by 9.0% per year. Having gone from being smaller than France to the second largest economy in the world, China has to start slowing down. We expect its GDP to grow by an annual average rate of 4.9% over the coming decade. But this doesn’t make China a less appealing place to invest. We foresee it moving aggressively up the ladder in terms of value-added over the next decade with the help of technology, particularly Artificial Intelligence.

And how attractive is China’s stock market at the moment?
Mark Matthews:
The Chinese stock market has always been cheaper than India’s in price/earnings terms, with the exception of two months in 2015. Today’s 45% discount, however, is much wider than the ten year average of 28%. In the past, such large gaps between the two were followed by good performance in China. So although it did very well in 2019, we think the Chinese market can still go higher in 2020. Taking a longer-term view, the Shanghai Composite should look a lot more like the S&P 500 than the Dow Jones industrial average in five years’ time. By then, the largest sector should be technology, and it should offer many more high-quality companies with structural growth stories than it does today.

You are currently positive on emerging markets as a whole – is this largely due to your positive view on China, or are there other countries within emerging markets that are currently attractive?
Christian Gattiker:
Yes that’s right, we are positive on emerging markets at the moment as the relative valuations are attractive and we believe that earnings growth momentum should accelerate from low base levels. The emerging market index is dominated by Asia and we believe this region should perform well, especially China, but we also like Brazil. Leading indicators suggest that the growth of Brazil’s economy should accelerate further in the coming months and the Brazilian equity market should provide superior earnings growth. Then there are the historically low yields and the implementation of the government’s reforms, which should also both support Brazilian equities.

So where do you see opportunities for investors in 2020?
Christian Gattiker:
Accelerating economic momentum in 2020 should drive bond yields up from record-low levels, which should create a very strong backdrop for global equities. In particular, cyclicals and beaten-down value stocks should prosper. Among cyclicals, we prefer the industrials and materials sectors, as well as the energy sector. Also, current valuations are undemanding both relative to other asset classes as well as on a historical basis. We also believe that high-quality growth stocks will remain attractive and that they will continue to dominate beyond a short-term economic upturn. As a result, we recommend that investors stay invested in high-quality information technology and communication stocks.

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