Bridge in Field

The year ahead 2020

20 Dec 2019

Terence Moll, Chief Strategist

Every decade deserves a name. Some of us remember the Swinging Sixties, the Nineties ushered in political change across the world, and the Noughties sounded deliciously saucy (although it ended with the global financial crisis).

But the decade just ending has been a no-name era. The ‘Teens’ label was taken, and ‘Tweenies’ never caught on, so the world spent ten whole years with no identity, just a grey association with slow growth, populism and melting glaciers.

Now we’re entering the ‘Twenties’. Will it be different from its gloomy predecessor? What can we expect in the next year or two?

UK – political hangover

Boris has his majority. He wants to secure it by focusing on the areas that swung towards the Tories in the election, with promises of investment and other support. What really matters though, is Brexit. The substance of the deal doesn’t really matter – hard, soft, runny or sunny-side up – the Prime Minister wants the UK out of the EU and soon. We think he’ll get this over the line in the next few months.

Meanwhile, the economy needs help. Three years of political uncertainty has meant three years of lost investment. An economy can only tread water for so long and the costs of Brexit in terms of lower trade and foreign investment will continue.

Growth in 2020 will be poor in absolute terms, and weak compared with other major economies. The Bank of England can’t do much with interest rates, so the government may have to spend more if things look really bad… but that’s not too likely in the next twelve months.

US – boring growth, Trump headlines

Americans are working in record numbers, but with wages still subdued, the US economy is likely to grow at around two per cent this coming year. The Federal Reserve is desperate to avoid a recession, so anything more than a temporary slowdown will be met with yet more monetary support, particularly as the election draws near.

We won’t be short of headlines in 2020. Donald Trump’s election campaign will run side-by-side with the impeachment proceedings. The US-China trade dispute won’t go away. Mr Trump might impose tariffs on other countries, possibly to punish the leaders of Canada and Europe following disagreements at the NATO summit.

China – closer to home

The Chinese government has spent decades telling its people that rapid economic growth and higher living standards make up for living in a police state. That argument is wearing thin. Public unrest in Hong Kong shows how people value their freedom. China’s leadership wants to stay in charge, though, so will keep on shutting down the protests.

From China’s viewpoint, the trade war with the USA is but a skirmish. While the US is a key trading partner for now, China is looking longer-term and closer to home. Half of the world’s population lives within a thousand miles of its borders, and that’s where the growth will be in the next few decades. China has been investing heavily in its neighbours, which should boost the whole of Asia in the 2020s.

Europe – more mush

Perhaps there’ll be a decade sometime when Europe is politically quiet, but it won’t be the Twenties. While populism erupted in the UK and the US via the Brexit and Trump volcanoes, Europe is facing death by a thousand cuts.

It has too many countries, each on its own election schedule and with its own different agenda. Tensions are rumbling in France, Spain, Italy and elsewhere. The European economic train is stuck at the station, with reforms uneven but slow overall. This won’t change in 2020, and Europe will rely on the rest of the world for growth.

Japan – demography is biting

Japan (as we remind everybody once a year) is still the third largest economy in the world. The Olympic Games this summer will be spectacular, to judge by the Rugby World Cup, and will encourage even more tourists.

But by the end of the Twenties, over one third of its people will be older than 65. The result: slow productivity growth and not enough entrepreneurs. Pockets of Japanese industry will do well over the next year – but without an influx of young people, domestic growth will lag. Like Europe, Japan will rely on importing growth from the rest of the world.

Three investment themes in portfolios

Healthcare. The whole world is ageing steadily, it’s not just Japan. And as people age, they spend more on healthcare – to give themselves more healthy years of life. Healthcare companies have suffered over recent years due to US politics and to underinvesting in research. But they’re now spending more on technology and on developing treatments focused on individuals and their needs. We have a core position in US healthcare stocks that should perform well in the long run.

Inflation. Across the world, inflation has been low for many years. We don’t see an inflation shock anytime soon, but also believe that fears of deflation are overdone. Central bankers are saying that they will tolerate inflation above their targets for a while, to balance out the lows of the past few years. We believe them, but the market doesn’t! We have a long US inflation position in portfolios that will gain if inflation rises in 2020.

Emerging market bonds. The main sources of global growth, in terms of both people and economics, are the emerging markets. One of their advantages is that they can gain from being poor, by borrowing advanced technology from abroad and leapfrogging costly stages of economic development. Visit a new Asian airport and the experience will be better than in Paris, Chicago or Rome. We think these economies are in good shape, with steady growth and low inflation, and hold a large overweight to emerging market bonds.

The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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