A trader at the New York Stock Exchange on October 30. With the US and China driving global recovery and hard-landing risks averted, stock markets could easily add 10-15 per cent upside potential next year. Photo: Xinhua
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
Global stock markets are in line for a bumper 2020 after the doom and gloom of 2019
Markets, having priced in the worst outcomes of the trade war, a Trump impeachment and Brexit, now seek good news. As central banks ease policy, political risks recede and with a trade deal in sight, 2020 should be glorious
One “golden” rule of investing is: buy the rumour, sell the fact. For contrarians, it is a well-travelled road, but the question is what follows after you have the facts: should it revert to buying the rumour again?
Markets have fretted over China’s trade war with the United States, the possible impeachment of US President Donald Trump and the threat of a hard Brexit in Europe. It is less clear what happens next. If 2019 was the year of living under a cloud, 2020 could be the year stock markets prove pessimists wrong.
There are good reasons that 2020 should be a good year for stocks – it is time to dispense with the bad news, get ahead of the curve and move on. Global markets have wallowed in worry for too long.
The latest round of global confidence indicators show optimism wavering but suggest little about what the future has in store. The key will be what drives global growth next year and its impact on markets and investment allocation decisions.
We might even be past the worst of political and economic risk factors. Markets have been thick with speculation about global recession, but this hardly resonates with stock markets hitting fresh highs and rising risk appetites. The world is awash with central-bank-generated liquidity after the 2008 financial crash, but there is more in the pipeline. Monetary authorities in the US, China, Europe and Japan all seem committed to easier credit conditions in the coming months to put more vigour into recovery prospects, which will improve next year as the new stimulus gains traction.
Easier monetary policies should also be complemented by more expansionary budget policies, especially in the United Kingdom and Europe, as governments call time on fiscal austerity with political priorities changing.
Next year’s US elections are also starting to feature strongly in market thinking about good news next year. Markets have already factored in the worst of the bad news surrounding the US-China trade war and a possible Trump impeachment, and are on the lookout for silver linings. A successful resolution of the trade war could be close at hand and Trump might soon start to ramp up expectations of a tax-cut giveaway ahead of elections. Even if the Republican Party chooses to dump Trump over impeachment risks in 2020, chances are that risk asset markets could be stirred into a frenzy of relief-related buying.
With the global policy bias shifting towards easing, political risks receding, and market confidence rebounding, there should be positive feedback loops for global growth and stock market optimism. With the US and China acting as the main drivers for global recovery and hard-landing risks averted, world stock market gains could easily add 10-15 per cent upside potential next year.
Markets might seem expensive from a price/earnings perspective, but with financial surveys showing investors relatively underweight on outlook concerns, investors could end up squeezed back into the market for fear of missing out on higher returns.
Source: New View Economics
If economic, political and market factors manage to work in harmony next year, the recovery in risk appetite could spark a major shake-up in asset allocation perceptions. The demand for safe-haven protection should diminish, with risk reversals out of cash and government bonds giving an additional boost to equity and credit markets. It would be the prelude to a major surge in government bond yields.
With Washington and Beijing leading the drive to stronger recovery, demand for US and China stocks should remain strong next year. Conversely, with Europe’s economy lagging, long US-short European equities would be a favoured relative trade bet.
Investors have had a lot of negative news to contend with this year but it could be coming to an end soon. 2020 should be a bumper year for global stocks.
David Brown is the chief executive of New View Economics
This article appeared in the South China Morning Post print edition as: Stock markets up for a bumper 2020 after the gloom of 2019
