What Macro Environment Should You Expect in 2020?

Fred Demers

Director, Multi-Asset Solutions


Jon Adams

Director, Multi-Asset Solutions


At the dawn of a new decade, market conditions look significantly different than in the previous 10 years. To help position your clients’ portfolios, Jon Adams and Fred Demers from the Multi-Asset Solutions Team, BMO Global Asset Management, discuss everything you need to know for the next 12 months – from regional market forecasts, to macro trends, politics and policy developments.   

How Markets Got to Where They Are Today

Fred: Looking back at our previous MAST outlook, it’s clear we took a rosy view of global markets. We predicted U.S. strength would continue against a backdrop of sluggish European growth and easing trade tensions. Judging by the impressive equity market performance in the U.S., our forecasts were largely correct; however, our timeline for de-escalation on the tariff war was perhaps too optimistic.

Jon: Yes, exactly. Though tensions dropped after the announcement of a “phase-one” deal between China and U.S., we expected negotiations to be further along at this point. Our appraisal of the European economy fared better – growth there was lackluster, and Brexit was an ongoing challenge. Nonetheless, equities across the continent managed to outperform expectations. A resumption of growth and slightly more progress on trade would bode well for risk assets.

Fred: Continued global expansion is certainly on the table for 2020. We have four main bellwethers on our watchlist for the year: stabilization in the manufacturing sector, labour market strength, accommodative monetary/fiscal policy – and of course politics. These four factors are expected to drive market outcomes across all regions, but the degree of impact will undoubtedly vary from country to country. At present, our base case calls for relatively stable interest rates and additional upside for global equities.

The Beginning of De-Synchronized Global Growth

Jon: Going back to the idea of further U.S. economic leadership, we expect it to continue this year despite a sharp slowdown relative to other geographies. The economy has been quite resilient this year; remember one year ago we were concerned about an imminent recession in the U.S., yet growth in the first two quarters was pretty solid and continues to surprise to the upside even in the second half, despite a slight slowdown. We expect domestic growth to run above two percent, compared to Europe, where the economy is on track for a little more than one percent.

Fred: There are structural reasons to explain why global growth is decoupling. Each region has very different political climates, track records on fiscal policy, and room for central bank intervention. Europe has challenges in Spain, Italy and obviously Britain that prevent it from keeping pace with the U.S. Meanwhile, China appears to be having a more cyclical slowdown. With some luck, gross domestic product (GDP) will come in at six percent or slightly below in 2020, but overall the path forward is headed toward slower global growth.

Jon: Nonetheless, there are bright spots to be found. We’ve noticed a lot of asset allocators moving toward European equities for the low valuations, so there’s certainly opportunity for some pick-up in ex-U.S. exposure. With respect to emerging markets (EM), there is a lot of debate over the impact Chinese stimulus could have in the coming years. As Fred mentioned, we expect slower – but stable – GDP numbers for its domestic economy, but there are broader concerns that this round of stimulus will not extend to other EM countries reliant on their trading relationships with China. A lot of Southeast Asian economies are, for example, extremely dependent on exports and could be negatively impacted by a prolonged tariff war. That said, we’re generally bullish on EM debt because there’s plenty of room to manoeuvre on the monetary policy side, unlike in developed markets, where rates have been near or below zero for years.

Fred: Also, as previously mentioned, strength in labour markets will be a key source of consumer confidence and economic stability. It’s a positive sign that recent salary forecasts predict global wages to grow at 4.9%, beating inflation expectations of 2.8%. At present, our base is for labour markets to remain solid in their support for risk assets. Beware downside risks though; if profit margins get too tight and macro uncertainty persists, the employment framework could ultimately weaken.

From Geopolitics to Local Politics

Jon: In terms of politics, we see a pivot from sweeping international concerns, such as the U.S.-China trade war, to more domestic affairs like the U.S. 2020 presidential race. Markets are focused on who emerges from the Democratic (Dem) field, given there is currently a wide spectrum of ideas ranging from moderate to very progressive. This will likely drive higher volatility and create buying opportunities through the year, though we believe the probability of radical change becoming policy is actually quite low. Even if a Dem candidate wins the White House, the odds are they will face a Republican majority in the Senate.

Fred: That’s true – only a small number of GOP seats actually appear to be in play. Meanwhile, over in the U.K., Boris Johnson’s decisive general election victory ensures Brexit will move forward on January 31, clearing some major uncertainties which have delayed business investment decisions in recent years. While this is positive for sterling and risk assets in the U.K., we do not expect U.K. outperformance in 2020, as its future relationship with the European Union, its main trading partner, remains in question. Luckily, the Bank of England does stand ready to react if needed, and Boris Johnson has outlined plans for additional spending in areas like health care, so we’re likely to see some fiscal stimulus as well.

Jon: Looking further east, the Japanese economy has been quite strong in the previous few quarters. We are seeing tentative signs that economic growth may have bottomed. So, if you look at asset prices, Japanese equities are attractive from a valuation perspective, and the yen offers some upside relative to the US dollar. The currency exposure can act as a hedge against our overweight equity view, but going forward we are generally bullish on all things Japan – particularly equities and currency.

Pulling the Monetary and Fiscal Policy Levers

Fred: Last year, we saw a pre-emptive response from central banks which differs greatly from previous cycles, especially from the U.S. Federal Reserve (the Fed). Rather than coming in late to rescue the economy, they started to ease, or at least signal easing, when global concerns emerged on the horizon. Usually we see their logic confined to domestic considerations. But instead they shifted from “autopilot” to rate cutting, providing a strong sense of safety for investors who were concerned about the onset of the late cycle.

Jon:  It was interesting to watch the evolution. This time last year, markets were expecting the Fed to continue hiking interest rates – instead we got three rate cuts. By all indications they will be on hold for the next year, but merely the implication that monetary policy will be accommodative allowed equity prices to climb higher. Earnings are down, business investment is down, consumer confidence is down, yet stocks have managed to climb that wall of worry.

Fred: In Canada, the main transmission channel for monetary stimulus is through mortgage rates. While the Bank of Canada (BoC) did not slash borrowing costs directly, it did manage to import easing by the Fed to the extent that interest rates moved down 100 basis points in the past year. This can have an enormous impact, because roughly 70% of Canadian mortgages are reset every five years. So, combined with strong population growth, we view the pick-up in the housing market as a significant tailwind. The country’s economic health is not uniformly strong. As the Alberta government struggles to manage the oil supply glut, we could see mounting pressure for the BoC to stimulate growth, but for now they can afford to be patient.

How to Position Your Clients’ Portfolios

Jon: If global risks die down and growth picks up, we could see money come off the sidelines and flow toward European equities that are attractive from a long-term valuation perspective. Institutional investors are already moving in that direction.   We remain tilted toward U.S. equities as we feel they will outperform in our base case of a slow rebound in growth as well as in a downside scenario. On the fixed income side, the reach for yield will likely continue, so we believe that U.S. government bonds will remain relatively range-bound. We prefer EM debt to U.S. high yield, as valuation in the latter look stretched and EM central banks have ample scope to cut rates.

Fred: You want to look for assets with an ability to generate higher yield. One of the side-effects of loose monetary policy is low to moderate inflation, which eats into the value of expected return and makes it challenging to find a satisfactory destination for fixed income within Canada and the U.S. The second issue is cyclicality. With the 10-year bull run likely nearing its end, you have to consider new ways to diversify client portfolios – and that’s where alternatives can help. I would suggest looking to both these areas in 2020.

Read our full MAST 2020 Outlook for more insightful market commentary, or contact your BMO Regional Sales Representative to learn about our unique investment solutions and innovative business-building ideas.


Also in the January 2020 Issue of Insights:

Say Hello to In-Depth Estate Planning >
Standing the Test of Time: How to Build on Success >


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