By Arno Lawrenz, Global Investment Strategist at Ashburton Investments.
A year ago, in late 2018, markets were awash with pessimism, and after the US Federal Reserve hiked rates for the 9th time with the prospect of more to come, December ended up experiencing the worst equity market performance in over 50 years. Fast forward till today, and the S&P 500 Index is up over 25% as at theend-November, and the Fed has cut rates three times already. This certainly points to how quickly the outlookand sentiment can change.
If we then look ahead into 2020, there are a few things we can say with reasonable conviction. Certainly, after fears of global recession arose during the course of2019, global monetary policy has shifted firmly into easing territory, and prospects of recession are now dissipating. We could possibly compare this time with the 2015-2016 period, when co-ordinated central bank policy at that time pulled markets out of the doldrums. We have already then had a foretaste of what is to come in 2020 as a result of the current stimulus.
But, as in 2016, the stimulus can only last for so long before more is required, and in 2020, we argue that the effectiveness of monetary policy alone will face serious questions. Indeed, some may argue that ultra-easy monetary policy sows the seeds of financial system instability. In that respect, 2020 may well show that fiscal stimulus will have to be employed in order to fend off fears of another global slowdown and to avoid the prospect of rising market imbalances.
With that in mind, while we are cautiously optimistic in the near term about prospects for equity markets, it will be those exact prospects that are likely to fade again as the extent of stimulus required becomes apparent during 2020. Unless authorities are then able to soothe such fears, the possibility exists that a more severe downturn may arise sooner than currently expected.
Bond yields may well benefit from safe haven flows, but an expansion of fiscal deficits may cause investors to increase the required risk premium. In a world of still low bond yields, emerging markets will also benefit from a continued search for yield, but we do not see the possibility of sustained gains in yields should risks (including geopolitical) keep rising.
