Global Weekly Commentary: Guide to our 2020 outlook
Key points
2020 outlook
Our 2020 Global outlook introduces three new investment themes, as well as a revamped tactical asset allocation framework.
Eyes on growth
We see growth stabilizing and gradually picking up over the next six to 12 months thanks in part to easy financial conditions.
UK election
The UK election this week – and a new government as a result – could offer some clarity on policy directions.
Chart of the week
BlackRock G3 Financial Conditions Indicator and Growth GPS, 2010-2019
Sources: BlackRock Investment Institute, Consensus Economics and Reuters polls, as of December 2019.
Notes: The Growth GPS shows where consensus GDP forecast may stand in three months’ time, shifted forward by three months. The orange line shows the rate of GDP growth implied by our financial conditions indicator (FCI), based on its historical relationship with our Growth GPS, shifted forward by six months. The gray area shows annualized actual growth rates on a quarterly basis; values after Sept 30, 2019 are consensus estimates . The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass.
We introduce three new investment themes for 2020. The first of these: Growth edges up over the course of the year, picking up the baton to support risk assets. The unusual late-cycle, dovish pivot by central banks has led to a dramatic easing in financial conditions. The impact of such easing on the real economy typically comes with a lag – but has been particularly delayed this time as it has been partially offset by the protectionist push. See the gap between our Growth GPS (yellow line) and where we would expect growth estimates to be purely implied by financial conditions (orange line) on the chart above. What would challenge this outlook? If U.S.-China trade talks break down, or protectionist pressures broaden and ratchet higher, it could undermine business and market sentiment, cutting short the growth uptick we expect.
Powerful structural trends are testing limits — and threaten to intersect with the near-term outlook and become market drivers. Rising inequality and a surge in populism have implications for taxes and regulation. Trade frictions and deglobalization are weighing on growth and boosting inflation. Interest rates are hitting lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real-world consequences, and affecting asset prices as investors start to pay attention.
This was the overarching backdrop for the discussions when some 100 BlackRock investment professionals gathered in November to debate 2020’s market outlook. Our outlook publication features key takeaways from these debates. Highlights include: how yields hitting lower bounds are prompting a rethink of the role of government bonds as portfolio ballast; the risk of supply shocks from deglobalization and climate change lifting inflation over time; the prospects for a pause in U.S.-China trade tensions; and the potential for divergent policy outcomes in the U.S. presidential election in 2020.
We also unveil a new framework for tactical asset allocation. The first step is understanding the current macro regime — and the likelihood of potential transitions between regimes. This is key, because different regimes have different implications for asset returns. We assess current valuations and incorporate the views of BlackRock experts. This results in a new set of views on broad asset classes for the next six to 12 months, as well as granular views within asset classes, including equity factors. We scale these views according to our conviction. Three overall takeaways: We are modestly positive on risk assets; neutral on global duration and cash; and see room for a cautious cyclical rotation. Under the hood, many of our calls on sub-assets have changed due to the shift in economic and market dynamics. For example, within equities we have downgraded the U.S. market to neutral, with concerns about rising political uncertainty around the 2020 elections. We have at the same time upgraded Japanese equities to moderately overweight, expecting Japanese companies to benefit from a global manufacturing recovery and domestic fiscal stimulus.
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