The Dawn of a New Decade: What’s Next?

As we usher in a new decade, market conditions for institutional investors will undoubtedly change, but we caution against becoming too pessimistic – especially alongside the supportive monetary and fiscal backdrop.
January 2020

Fred Demers

Director, Multi-Asset Solutions


Jon Adams

Director, Multi-Asset Solutions

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As we usher in a new decade, market conditions for institutional investors will undoubtedly change, but Jon Adams and Fred Demers of the Multi-Asset Solutions Team at BMO Global Asset Management caution against becoming too pessimistic – especially alongside the supportive monetary and fiscal backdrop. In this issue of IQ, they discuss all the factors necessary to optimize your portfolios – from macro trends to politics and regional forecasts.

Continued Global Expansion in 2020

Coming off an impressive U.S. equity market performance last year – and ahead of the hotly anticipated U.S. presidential elections in November – our Multi-Asset Solutions Team has an overall constructive view on 2020, with expectations for continued global expansion, and further room for upside with respect to risk assets.

It’s clear our previous 2019 outlook took a rosy view of global markets, as we predicted U.S. strength would continue against a backdrop of sluggish European growth, and easing trading tensions. Our forecast was largely accurate, with exception to our overly optimistic timeline for the de-escalation on the tariff war between the U.S. and China.

Looking ahead, our forecast for the dawn of the new decade is underpinned by four main drivers: stabilization in the manufacturing sector; labour market strength; accommodative monetary/fiscal policy, and of course, the least predictable of them all – politics. Each of these factors will undoubtedly differ with respect to their impact on different regions, but our base case calls for relatively stable interest rates and additional upside for global equities.

While uncertainty is in fact a certainty in terms of political developments in 2020, we caution institutional investors from focusing too heavily on macro headwinds, and too little on the fundamental backdrop at hand.

Despite the political uncertainty, we caution against focusing too heavily on macro headwinds, and too little on the fundamentals.

Monetary and Fiscal Policies: Reliability is Key

This backdrop includes accommodative monetary policy, which was the major driver of markets in 2019. Last year, we saw a pre-emptive response from central banks to slowing growth, which differs greatly from previous cycles, especially with the U.S. Federal Reserve (the Fed). Rather than coming in late to rescue the economy, it started to signal easing when global concerns emerged, followed by three rate cuts instead of the anticipated hikes. This shift from “autopilot,” as well as moving beyond domestic considerations, provided a strong sense of safety for investors who had lingering concerns about the onset of the late cycle.

By all indications, the Fed will be on hold for the next year, but from our perspective, the mere implication that monetary policy will be accommodative allowed equity prices to climb a wall of worry in 2019, surpassing declining corporate earnings, trade tensions, and weak business investment.

Overall, central banks’ proactive and pragmatic behaviour support our expectations for sustained 2020 growth.

In Canada, the main transmission channel for its central bank is through mortgage rates. While the Bank of Canada (the BoC) did not slash borrowing costs directly, it did import easing by the Fed to the extent the five-year mortgage rate moved down roughly 100 basis points in the past year. This can be impactful because roughly 70% of Canadian mortgages are reset every five years. Combined with strong population growth, we view the pick-up in the housing market as a significant tailwind. Nevertheless, the country’s economic health is not uniformly strong, as the Alberta government struggles to manage the oil supply glut, which we believe is a major headwind. As a result, there could be mounting pressure on the BoC to stimulate growth, but for now it can afford to be patient, and we believe it will be closely aligned with the Fed this year.

While global interest rate levels look broadly appropriate at this time, the benefits of last year’s rate cuts are likely to fade throughout 2020. Overall though, monetary conditions and central banks’ proactive and pragmatic behaviour support our expectations for sustained growth.

Importantly, on the fiscal front, it is comforting to know that many regions are willing to accelerate stimulus should a downturn develop, which provides another element of underlying support. Of note, Germany, China, Canada and others are expected to increase spending on “green-focused” investments as the sustainable movement gains momentum.

Desynchronized Global Growth: U.S. Leadership to Persist

U.S. economic leadership is expected to continue this year, despite a sharp slowdown relative to Europe, and other geographies. Aside from previous fiscal stimulus which has persisted, much of this is on account of a resilient consumer in the U.S., as well as positive contribution from housing markets, even amid a weak capex and export environment. One year ago, we were concerned about an imminent recession in the U.S., yet growth in the first two quarters were solid, and continued to surprise to the upside in the second half – even with a slight slowdown. We expect U.S. growth to run above 2%, compared to Europe, where the economy is on track for a little more than 1% as it continues to face headwinds that slow its expansion.

Different political climates, fiscal track records and room for central bank intervention are all reasons why we’re starting to see the decoupling of global growth. Political challenges and populism tensions in Spain, Italy and of course – Britain – have prevented Europe from keeping pace with the U.S.

Meanwhile, in emerging markets (EM), China appears to be experiencing more of a cyclical slowdown, with growth anticipated to hit 6%, or slightly below, in 2020. There is significant debate over the impact Chinese policy stimulus could have in the coming years: our indication is that the effect of the extra fiscal boost will not be substantial, as we expect slower – yet stable – GDP numbers for its domestic economy. The broader concern, however, is that this round of stimulus will not benefit other EM countries to the same extent, so they will be more reliant on a decline in trade tensions between the U.S. and China. Many Southeast Asian economies, for example, are extremely dependent on exports, and could be negatively impacted by a prolonged tariff war. That said, we’re generally bullish on EM broadly, particularly on the debt side, where there is plenty of room to manoeuvre on monetary policy to engineer additional growth, as compared to developed markets where rates are near, or below, zero.

We’re generally bullish on EM broadly, particularly on the debt side, where there is plenty of room to manoeuvre on monetary policy.

Nonetheless, the economic bedrock globally is strength in labour markets, which is a key source of stability and consumer confidence in larger regions like North America, Europe and Japan. Recent salary forecasts predicted global wage growth at 4.9% ─ well ahead of 2.8% global inflation expectations. There are still downside risks though, including tight profit margins, and persistent macro uncertainty, which could ultimately weaken the employment framework. Despite these possibilities, our base case at present is for labour markets to remain an important source of support for risk assets.

On the currency side, we are positioned modestly underweight on the US dollar, as we believe the trade situation will improve, and that growth outside the U.S. will pick up, especially with respect to the manufacturing sector, while the euro and yen should outperform as global growth re-accelerates.

Political Uncertainty Prevails

There is no denying that unpredictability with respect to political developments will likely influence markets to a large degree in 2020, particularly on the back of the U.S. presidential elections in November. Right now, investors are intently focused on who emerges as the Democratic (Dem) nominee given the split between moderate (e.g., Joe Biden) and progressive (e.g., Elizabeth Warren) platforms, and the unlikely prospect for major policy shifts. While we will receive more clarity in the Spring, even if a candidate from the more progressive wing secures the Dem nomination and wins, the odds are the agenda will still face a Republican majority in the Senate since only a small number of GOP seats appear to be in play. The probability of radical policy change is slim, but we still expect the fear of potential outcomes to drive higher volatility and create buying opportunities throughout the year.

The probability of radical policy change is slim, but we still expect the fear of potential outcomes to create buying opportunities.

In addition, further progress on U.S.-China trade negotiations would be positive for business confidence and risk assets, and we do not anticipate President Trump to open additional trade-war fronts, which would surely distract from his domestic priorities in 2020.

In the UK, Boris Johnson’s decisive victory ensures Brexit will finally move ahead on January 31, removing some major uncertainties that have stunted economic growth and investment in recent years. While this positively impacts the sterling and UK equities, we do not expect outperformance in the region in 2020, as its future relationship with the European Union – its main trading partner – hangs in the balance. If necessary, the Bank of England does stand ready to act, and Boris Johnson has already outlined plans for additional spending in areas like healthcare, so any fiscal stimulus should be broadly supportive of the economy.

Optimizing Your Portfolios in 2020

Ultimately, while a significant amount of time is spent on analyzing potential negative scenarios, the world is much steadier than news flow suggests, and not enough time is spent on the upside potential. Of course, uncertainties remain, but some clouds have lifted, and a soft landing of economic growth will support higher equity prices. We are already seeing institutional investors move in the direction of European equities based on a long-term valuation perspective, and we would expect more capital to flow this way, particularly if global macro risks die down, and there is evidence of growth expansion.

Our multi-asset solutions team (MAST) continues to favour U.S. equities on the expectation of outperformance amid a slow rebound in growth; looking further east, Japanese equities are attractive as their valuations are relatively inexpensive. Its economy has been quite strong in the previous few quarters, and we are seeing tentative signs that growth may have bottomed.

On the fixed income side, the continued reach for yield will still be a dominant theme for institutional investors in 2020. Another important issue is the need to reduce cyclicality. With the longest economic expansion seen in U.S. history, it is important to look for new ways to diversify institutional portfolios.

Related Capability

Learn more about our Multi-Asset capabilities.

Alternatives are a practical solution to diversify portfolios – and reduce cyclicality in the current environment.

To this end, we believe alternatives, which are increasingly appealing in a late-cycle, low interest rate environment, are a practical solution to safeguard investments from short-term risks and generate robust returns. Taking an active approach to managing their portfolios, Canadian institutions have been at the forefront of the shift towards alternatives, and we expect the asset class will attract even more capital in the near future: a recent survey of 50 pension funds, insurance companies, endowments, foundations and fund managers found that 58% planned to increase their allocations to alternative investment strategies – including infrastructure, private equity, private debt and hedge funds – over the next 12 months.1


To learn more about our asset allocation views, and other ideas to enhance your portfolio, please contact your Regional BMO Asset Management Institutional Sales & Service Representative.


Also in the Winter 2020 Issue of IQ:

A Passive ESG Strategy to Meet Growing Demand 
Private Equity Growth at the Expense of Hedge Funds 

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  1. The Race for Assets: Canada, CIBC Mellon, May 2019.


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This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

This commentary has been prepared by BMO Asset Management Inc. the portfolio manager. This update represents their assessment of the markets at the time of publication. Those views are subject to change without notice as markets change over time.

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