Investment Perspectives 2020

Executive Summary

2019 was an exceptional year for financial markets

The past year has been an exceptional vintage for financial markets with strong performances observed across all asset classes. Recession fears and concerns over a hawkish Federal Reserve, which had triggered a severe market correction during the last quarter of 2018, were dispelled from the onset of 2019, leading to a significant rally of the equity and bond markets.

A dramatic turnaround by the US central bank, optimism over a US-China trade deal and the unwinding of pessimism about the economy were the main drivers for outstanding equity gains. The trough of the equity correction at the very end of 2018 meant that there was more room for a catch-up rebound in 2019. Accommodative central banks across the world and low inflation pressures also contributed to well above- average returns for bond and credit markets whereas fluctuations in the currency markets were generally modest, in particular for the major crosses.

Central banks to the rescue again

More than half of the central banks are now in easing mode, the biggest proportion observed since the financial crisis, and close to two-thirds of all central banks cut interest rates during the third-quarter of 2019. The dramatic reversal of the Federal Reserve’s monetary policy was one of the main triggers for last year’s rally of financial assets. From a starting point where the US central bank was planning for two rate hikes in 2019, the end result was three quarter-point rate cuts and the premature ending of the contraction of its balance sheet; in fact, the Fed’s balance sheet has even been expanding again since September. The European Central Bank also added additional monetary support despite its limited room for manoeuvre. In September, the bank decided to cut rates by 0.1% to – 0.5%, to restart QE (€20 billion per month) and to introduce other supportive measures.

The outlook for the global economy appears a little brighter

The slowdown of growth observed in 2019 had been fully expected. The economic outlook, however, looks more promising now. A decline of trade tensions should finally result in the signing of a limited deal between the US and China. Recent economic data has also started to show some signs of an improvement for the manufacturing sector and solid labour markets should continue to support consumer spending. The risk of a recession has also decreased, so the combination of all these factors could result into a positive surprise for the economy in 2020.

Current market conditions are supportive for risky assets

We believe that financial markets should get off to a positive start in 2020 and we have recently boosted
our allocation to equities. Investors are more likely to continue increasing their allocation towards risky assets in view of the less attractive alternatives. One must nevertheless keep in mind that the starting point for investments’ returns is much less promising than a year ago, when the valuations of equities and high yield debt instruments had collapsed. This means that the prices of assets are more vulnerable to disappointments as monetary and fiscal policies have already brought forward a substantial amount of future growth and returns.

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