Soft landing, earnings returning

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Geopolitical risks that dominated headlines in 2019 - such as the trade war - have been subsiding. If this fragile calm can persist throughout 2020, we should see a soft landing for global Gross Domestic Product (GDP) growth. The synchronised wave of dovish central bank policy in 2019, plus a confident consumer buoyed by strong employment markets, should be enough to prevent a global recession in major economies - for now. However, pockets of weakness remain, most notably in the manufacturing and industrial sectors. We believe inflation will re-emerge in 2020, as wage pressures build amid low levels of unemployment and tariffs add to input costs, or their removal triggers a surge in growth.

US Federal Reserve rate cuts in 2019 are helping the US housing market, adding an important support to the economy. Our expectation is for US GDP to grow at 1.9 per cent, assuming that Presidents Trump and Xi sign the ‘Phase 1’ agreement and suspend the escalation in tariffs. While Trump will continue to pressure the Fed to cut rates in the run-up to the election, the state of the economy and stock markets at all-time highs point to a pause in easing for now. Late-cycle dynamics appear poised to last for yet another year. We may well see a rebound in risk sentiment in anticipation of better news from manufacturing and export sectors, strengthening the case for inflation to pick up in the US.

European economies meanwhile should escape recession too, with around 1-1.5 per cent GDP growth. Against this backdrop, negative rates will persist in Europe, with bund yields trading in a range of -20 to -60 basis points. Bunds could move closer to zero if trade talks go exceptionally well, but positive yields seem unlikely while the European Central Bank remains in easing mode. If the trade war escalates again, we expect attention to switch to fiscal stimulus within individual countries. An EU-wide fiscal plan looks unlikely in the short term.

We expect Chinese growth to slow in 2020, but in a managed fashion thanks to targeted stimulus. Even with a resolution of the trade war, risks remain for the Chinese economy. Emerging markets (EM), which feel the impact of trade tensions most acutely, will be vulnerable to dollar strength and a more hawkish tone from the Fed. At present, monetary policy throughout EM remains accommodative and, in aggregate, EM economies are likely to generate solid growth in 2020. Even so, investors in emerging markets will need to remain selective and side-step idiosyncratic risks - in particular, populist unrest which has claimed several heads of state across emerging markets in the last 12 months.

Domestic and international political risks remain the most significant tail risk for 2020, in our view. Central banks, having carried the baton almost as far as they can for the last decade, look increasingly spent. How governments now confront questions of growth, inequality and demographics will be key for investors over the next decade.

Table: Fidelity International growth and inflation estimates for 2020

Source: Fidelity, November 2019,  *CPI


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