New approach to markets helps temper macro risks

2019 has turned out to be a rewarding year for investors, as global equities generated double digit returns led in particular by the US which scaled fresh highs. Even fixed income assets performed strongly with single to double digit gains. What's next in 2020?

Investors may fret - with reason - that such strong returns are unlikely to be repeated. But switching into lowrisk assets such as cash, while shielding you from volatility, isn't the answer as interest rates remain very low.

Instead, a sensible diversified approach where exposures are balanced across a number of asset classes is likely to stand you in good stead, generating returns in a risk- controlled way.

Analysts at Citibank say macro risks lurk in 2020 due to ongoing trade issues, US impeachment concerns, oil market disruptions, and country- specific political risks. On trade, for instance, tensions between the US and EU are set to rise as aircraft tariffs go into effect, in addition to the threat of auto tariffs. The US has also proposed import taxes on US$ 2.4 billion worth of French goods in retaliation for France's digital services tax.

On the US- China trade conflict, a Phase One agreement was announced in early December, where China agreed to billions of dollars in agricultural purchases from the US, while President Donald Trump promised to reduce some tariffs.

But trade tensions are not over, say Citi analysts, as uncertainty hangs over a Phase Two deal which will focus on technology and possible reduced sanctions on Chinese technology companies.

In the UK, there is relief over an orderly Brexit following the landslide victory of Prime Minister Boris Johnson and the Conservative Party.

“But the reality of a hard- but- smooth Brexit could weigh on investments from 2H 2020, particularly if the government fails to request a longer transition period by July 1, 2020.''

Projections for global growth drifted down in 2019 due to trade concerns. Developed markets ( DM) may well slow to below- trend growth compared to the last 20 years. But emerging markets ( EM) economies could see a moderate rebound.

Citi analysts expect global growth of 2.7 per cent in 2020 and 2021, compared to an expected growth of 2.6 per cent in 2019. DMs are forecasted to grow 1.5 per cent in 2020 and 2021, and EMs are expected to grow by 4.2 and 4.3 per cent in 2020 and 2021, respectively.

BlackRock Investment Institute notes that 2020' s macro environment marks a distinct shift from the dynamics of 2019, due to central banks' dovish turn. “This makes growth the key support of risk assets. Our base case is for a mild pickup supported by easy financial conditions with a slight rise in US inflation pressures.''

Eastspring Investments also believes an extended global growth cycle is a key theme this year. “Household and corporate debt in the developed markets are under control and there is no risk of an asset bubble bursting which would cause the onset of one. This should potentially put a floor under risk assets. Signs of a stabilisation in global growth can further lift equities, particularly markets that are more leveraged to the global economic cycle,'' it said.

A silver lining to global macro clouds is domestic resilience. Say Citi analysts: “Uncertainties have weighed on confidence and business decision making, and also undermined investment intentions in part because firms think consumers may pull back.

However, this has not quite been the case, and domestic resilience through strong labour markets has helped growth.''

Asia is an example of domestic strength. Asia's GDP growth is expected at 5.2 per cent in 2020, and China at 5.8 per cent. While progress in trade

to

counter

slowing

trade talks is important, Citi analysts also see signs of improvement in China's domestic economy which could be poised for recovery if there is a rebound in production following a sharp drop in inventories.