Soft landing, earnings returning
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
View Fidelity's other 2020 outlooks
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.
This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. This material contains statements that are "forward-looking statements", which are based on certain assumptions of future events. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialise or that actual market conditions and/or performance results will not be materially different or worse than those presented. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009.
© 2019 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.