What to expect from markets in 2020

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What can we expect from markets in 2020, the year of the rat?

As the first animal in the 12-year Chinese zodiac cycle, the rat is known for its wit, and is often seen as a sign of wealth and surplus.

Before we start, a quick throwback to 2019

Despite economic and geo-political uncertainties such as the US-China trade tension and Brexit in the UK, 2019 turned out to be a rewarding year for investors. Global equities as measured by the MSCI All Country World Index gained 25.6%¹ for the year, while the Barclays Global Aggregate, an index commonly used to represent the global bond market, rose 5.4%¹ — both performances in Singapore Dollar term. Asian equities may have been more subdued, but they still delivered a more-than-decent 16.7%¹ return in Singapore Dollar term last year, compared to the average 6.6%¹ annualised return in the last decade.

After a volatile 2019, what can investors expect in 2020?

A significant part of last year's performance occurred in the fourth quarter, as trade war concerns and Brexit uncertainty began to subside. The US Federal Reserve (Fed) had also cut the interest rate three times through the year, and began injecting liquidity into the banking system and buying US treasury bills again in October 2019. This created a huge tailwind for financial markets, which we believe would continue into the first quarter of 2020.

With the truce in the US-China trade conflict, we now expect economic indicators to gradually pick up in 1Q 2020. Already we have seen the Purchasing Manager Index (PMI) for China rebounding above 50 — indicating acceleration in economic activities — since November 2019, while the same economic barometer for Europe has stabilised in the last quarter of 2019. The US Institute for Supply Management’s PMI continued to decline in December last year to reach a 10-year low. However, we believe that reflects the condition of peak trade tension, which would improve as the trade war de-escalates. Any roll-back of tariff and recovery of global trade should boost business sentiments.

In the meantime, monetary policies are likely to remain accommodative globally. The Fed, after cutting rates for the third time in October 2019, is unlikely to reverse course anytime soon, lest it is seen to be fickle-minded. In addition, with the upcoming US Presidential Election in late 2020, the Fed would not want to be seen to be tightening monetary condition at this sensitive juncture. Meanwhile, the People’s Bank of China cut the Reserve Requirement Ratio for Chinese banks on New Year’s Day, effectively releasing more liquidity into the country’s banking system. All these should be positive for financial assets in the near term.

So, are there any areas of concern?

The situation in the Middle East remains volatile, especially with the killing of Iran’s top general Qassem Soleimani by the US. While any military escalation in the region that increases US involvement would likely be negative for investment sentiment, we do not expect a significant impact on oil prices, given that the US — which used to be a large oil importer — is now largely energy independent with its own domestic shale oil and gas supplies. Moreover, developed markets are now less sensitive to oil price movement given the higher service component, and hence lower energy intensity, of their economies. Nonetheless, a war involving the US is likely to be a major distraction for the country that will divert productive resources to military activities.

There is a growing view that the conflict between the US and China is more than just about trade, but also a matter of strategic rivalry. If so, the US could continue to exert pressure on China via non-tariff means, such as restricting sales of high-tech products to Chinese companies like how it did to Huawei last year. At best, this could scrimp the development of China’s IT industry, which is the main engine of growth for the country. At worst, it could threaten the survival of some of China’s IT companies that are highly reliant on imported technologies. A weakened Chinese economy would be negative for the region.

Global economy likely to trudge through 2020

Finally, while recession is not our base case, one needs to be cognisant of the possibility given that we are already in the longest period of economic expansion in history. This could occur in two ways. Firstly, inflation could make a comeback. Given that most countries are currently experiencing a relatively low unemployment rate, a pick-up in wage growth could result in higher inflation, thereby forcing central banks to raise rates. This would lead to a slowdown in an already sluggish growth environment, and tip the world into a recession. Alternatively, if global trade fails to recover soon, businesses may be inclined to start retrenching workers, thereby affecting consumer spending. With the consumer being the main pillar of strength in most economies, a decline in consumption would likely cause the global economy to slump towards a contraction.

In summary, we expect the relief rally that started in 4Q 2019 to likely continue into 1Q 2020 fuelled by easy monetary policies worldwide. However, lacklustre growth prospects going into the second half of the year, coupled with geo-political uncertainties, would likely translate into subdued performances yet heightened volatility in markets. Overall, the year 2020 is likely to deliver normalised but uneasy returns for investors.

Note:
1. Source: Bloomberg, data as at 31 December 2019.