FORTUNE TELLERS
You’d need some serious psychic powers to foresee what 2020 will hold for financial markets. Bill Jamieson brings us a round-up of predictions from all of the best crystal balls
It's the time of year for financial prediction, so Bill Jamieson dusts off his crystal ball
If 2019 was not a sufficient humiliation for economic forecasters, what do they now divine from their steamed-up crystal balls in 2020? The turn of the year and early January bring a rash of predictions from economists, investment banks and fund managers, though their forecasting appetite ought to have been curbed a little from the humbling experience of the past 12 months.
Interest rates did not rise as most expected but have either remained flat or in some stand-out cases such as the US, have been cut.
Britain did not succumb to recession as some feared. Germany did not see recovery but moved nearer to the brink of recession. As for the UK stock market, it did not succumb to a correction as falls at the turn of 2018-19 suggested, but by early December achieved a modest advance.
As for Brexit, the mist across the crystal balls proved impenetrably dense – and remains so given the deep division of opinion over whether the UK will enjoy a Brexit bounce or succumb to disillusion before spring has arrived.
Yet still, the predictions come thick and fast. The festive period and the onset of a new year has traditionally proved a popular time for savers to assess prospects and for stock market investors to check their nest eggs. Profits are taken, loss-making holdings sold and fresh choices made in the hope that 2020 will bring more rewarding returns.
This seasonal appetite for review will have been heightened by the spectacular crisis that has befallen star fund manager Neil Woodford and the once-hugely popular funds he managed, with some 300,000 investors still trapped and unable to sell their holdings in the stricken Woodford Equity Income fund. Once valued at £10bn, the fund over the past year has dropped 27.7% and by 35.9% over three years. Woodford Patient Capital investment trust has also suffered from the fall-out. Few pundits foresaw the crisis.
Notably more predictable has been the stampede out of open-ended property funds as many conventional high street retailers fall to their knees. But it is not just investors in household name retailers who have suffered. Pension funds and insurance companies who are major owners of retail property have also fallen on hard times. In early December the giant M&G Property Fund, once valued at £2.5bn, imposed a block on sales in the wake of a near £1bn outflow in the past year. Concerns over the emptying of high street sites caused investors to pull out of the fund leaving managers unable to sell their property assets fast enough to give savers their money back. Now there are fears that other open-ended funds specialising in commercial property could suffer a similar fate.
Little wonder that ‘portfolio review’ will be a preoccupation of investors as the new year unfolds. But what do the futurologists in leading global institutions and investment banks now forecast for 2020?
Arguably the most bizarre set of predictions has come from Danish investment bank Saxo. It forecasts UK economic growth doubling to a nominal eight per cent (i.e. before allowing for inflation), the launch of an America First Tax and Asian nations banding together to take down the US dollar. While its outlier predictions do not constitute its official market forecasts for 2020, the bank have justified these predictions by stating that it is always a useful exercise to consider the full extent of what is possible – if not necessarily probable – in markets.
Steen Jakobsen, Saxo chief economist says, ‘We see 2020 as a year where at nearly every turn, disruption of the status quo is an overriding theme. The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment.
‘In politics, this would mean the sudden failure of populism, replaced by commitments to ‘heal’ instead of to divide. In policymaking, it could mean that central banks step aside and maybe even slightly normalise rates, while governments step into the breach with infrastructure and climate policy-linked spending.’
Among the other ten unlikely but underappreciated events are: the US central bank forced to finance massive spending initiatives launched by the Trump administration to stave off a recession. Rising inflation and yields in turn will force up the cost of capital, putting zombie companies out of business as weaker debtors scramble for funding. Globally, the US dollar suffers an intense devaluation; new European Central Bank president Christine Lagarde reverses monetary policy and hikes rates in January, followed by another a short time later; and Hungary leaves the EU, with Viktor Orban talking of Hungary as a ‘blood brother’ with renegade Turkey.
Rather more restrained are the forecasts from US investment bank Goldman Sachs – but perhaps no less fanciful given its wayward track record in prediction. Back in 2017 its boss Lloyd Blankfein was hinting that with the UK set for a Brexit slowdown, Frankfurt would become a key European base for the Wall Street giant. It has also been notably downbeat about the UK’s economic performance over the past two years.
But the tone of its latest global assessment is more upbeat. It expects the global growth slowdown that began in early 2018 to end soon. And although annual average GDP growth is likely to rise only modestly from 3.1% in 2019 to 3.4% in 2020, it forecasts gradually rising growth to 3.6% in 2021.
It sees a growth improvement in the US with a more gradual pickup in Europe, ‘where the fiscal boost is likely to remain (too) limited’. But the UK is set to see a growth pick-up, ‘helped by a sizeable fiscal boost’, with the economy expanding at two per cent rate in 2021 after 1.1% in 2020.
But don’t pop the bubbly too soon. Ratings agency Moody’s has issued a debt downgrade warning to the entire world on fears that political turmoil from Westminster to Hong Kong poses a threat to the economy. It has cut its global sovereign outlook to ‘negative’ from ‘stable’ for 2020, cautioning that ‘disruptive and unpredictable’ politics was worsening the slowdown in growth.
After warning of a possible ratings downgrade on UK sovereign debt, it said populism and trade tensions globally raised the risk of bigger economic shocks and the ability of policymakers to counter them. The UK was among four countries singled out as ‘countries being monitored closely’.
And the Organisation for Economic Cooperation and Development (OECD) says in its latest quarterly report that global growth remains at the slowest pace since the financial crisis, and it doesn’t expect any improvement next year.
It has lowered its forecast for global growth in 2020 to 2.9% from its September 2019 forecast of three per cent. ‘What we are seeing is investment stalling, paving the way for growth to stay at this very low level,’ says Laurence Boone, the OECD’s chief economist.
There is also dismay at the lack of progress in the US-China trade talks. If the economic outlook in the US, UK and Europe deteriorates, central banks will become more accommodative. Although their tools may be becoming less effective, Boone believes they will still be impactful – especially for the stock market. So – as if rock bottom interest rates and monetary loosening has not created an asset bubble already, here is the flickering beacon of hope as the New Year opens. Mind how you go.