With the Federal Reserve smiling on them, equity markets should have a good year

The US and China have reached a partial trade deal, amid forecasts for higher global economic growth in 2020. In addition, central banks like the Fed are not only keeping policy loose but also showing greater tolerance towards inflation

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Jerome Powell, chairman of the US Federal Reserve, left, and Steven Mnuchin, US Treasury secretary, arrive for a Financial Stability Oversight Council meeting at the US Treasury in Washington on December 19, 2018. Photo: Bloomberg

Published: 1:00am, 25 Jan 2020Updated: 1:44am, 25 Jan 2020

Global equities have started the year on a high, supported by a clearer economic outlook following the signing of the phase one US-China trade deal.

Indeed, many economic forecasts point to better global growth in 2020 than last year. Just this week, the International Monetary Fund released its own projections showing the global economy would expand 3.3 per cent in 2020, compared to 2.9 per cent in 2019.

This improved outlook is set against a backdrop of loose policy by central banks and the provision of cheap money.

This combination supports riskier assets like equities. However, given the strong run, investors are right to ask about the risks. Certainly, politics is near the top of the list and markets may be volatile in the lead-up to the US presidential election in November.

Trade will be an ever-present issue. Even with the phase one deal completed, it remains to be seen whether both sides will hold up their end of the bargain. Then there is geopolitics: disruptions in the Middle East could also be a feature of 2020.

Notably, inflation doesn’t feature heavily on market participants’ list of worries given the low-inflation environment that has existed for some time. But are investors becoming too complacent about this issue?