- Global stock markets rallied in the fourth quarter supported by signs of stabilization in the global business cycle and improved sentiment towards U.S.-China trade and Brexit.
- Conditions remain supportive for gains in stock markets but stabilizing growth, low interest rates and contained wage inflation need to result in better corporate earnings to sustain the year end rally.
- Economic growth in 2020 will likely be positive, but weaker than most years over the past decade; we don't anticipate a strong upturn similar to 2017 and 2018.
Despite ongoing geopolitical tensions, 2019 ended on a positive note. Stock markets rallied in the fourth quarter in response to a stabilizing global business cycle and improved sentiment towards U.S.-China trade and Brexit. Global stocks, as represented by the MSCI All Country World Index (MSCI ACWI), were up 7.4% in local currency terms during the quarter, adding to an impressive recovery from the lows of 2018. The MSCI ACWI ended 2019 up 23.7% (local currency return), a record high.
During the year, we tracked several key themes that will also guide our outlook for 2020:
Central banks remain accommodative with room for further support if needed
Central banks continued down their dovish path after several months of easing, further pivoting away from the rate hikes that characterized 2018. We believe most of the anticipated easing has already happened. If all remains calm on the geopolitical front, monetary policy will likely be more of the same in 2020.
As central banks around the world eased policy, it's no shock that global bond yields fell in 2019. Yields did, however, tick upwards slightly in the fourth quarter.
Inflation remains in check—under 2% in nearly all developed markets. This gives policy makers the flexibility to hold on rates and more room to ease further should economic conditions deteriorate.
Commodity markets are (somewhat surprisingly) stable
Commodity markets during the quarter were more stable than most would have expected given September's attacks on Saudi Arabia. This leads us to believe that the market is well balanced, with ample supply and only modest increases in demand given the slowdown in manufacturing and trade. We saw further proof of this as the recent situation in Iran played out with minimal impact to commodity prices.
Positive signs from international markets
Stabilization in China is key right now. Chinese policy makers have been engineering a soft landing after the deliberate deleveraging of the Chinese economy in 2018. The support provided has been appropriate—we haven't seen the level of stimulus to match that of 2015-2016—so the recovery has not been as rapid, but more balanced.
As growth in the U.S. and China have stabilized, signs of weakness remain in the Eurozone. However, sentiment appears to be improving, with expectations for German economic growth recovering strongly in the fourth quarter according to the ZEW Economic Research Institute. This should bode well for a recovery in the region this year.
No shortage of risks as we enter the new decade
It appears U.S.-China trade and Brexit have taken a backseat, at least in the short-term, as focus moves to the U.S. election and the pending impeachment trial of U.S. President Donald J. Trump. There is still room for heightened political rhetoric to test investors' nerves.
Lower growth for China and developed markets remains a key risk—economic growth in 2020 will likely be weaker relative to much of the last decade, leaving less margin for error if financial conditions worsen.
The potential for a President Trump loss could also be a risk to markets. It could mean the unwinding of the Trump Administration's tax policies and risks to the information technology, energy and health care sectors depending on his successor.
We also need to consider corporate profits. Despite global stocks rallying to end the year, corporate earnings growth stalled along with the manufacturing and trade cycle globally.
Here's to a good 2020, just not as good as recent years
Most signs are pointing to further stability on the road ahead. With global economic growth expected to be lower than most years over the last decade, even with the global business cycle stabilizing, we likely won't see the kind of strong upturn that we saw in 2017 and 2018.
On the positive side, inflation trends and capital market signals continue to indicate that financial market conditions remain accommodative. There is also room for policymakers to step in and act if any major risks surface in the months ahead.
At this time, we continue to favour both North American stocks and currencies but we did rotate some assets into international developed markets over the last quarter.
We don't see any immediate red flags indicating a recession is on its way—in fact, the global economy looks likely to avoid a major downtown in 2020. With prospects for the U.S., China and the Eurozone modestly improving, conditions remain in place to support further stock market gains.
In order for stocks to rally once again, earnings growth must push back up. This isn't an impossible scenario—stable growth, low interest rates, and contained wage inflation mean there is room for recovery. Patience may be needed—as it may take a few quarters for this to come to pass.
To learn more about the impact of these global economic trends on your investments, I encourage you to talk to your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).