We are going through challenging times with rising geopolitical and macro risks in many parts of the world. Over the course of 2019, trade war tensions, Brexit fears, and other geopolitical worries contributed to the slowing down in investments and manufacturing, and eventually to the deterioration in the macro backdrop.
However, things are not as disheartening as they seem on the surface. By year end, global stocks added more than $10 trillion, returns on credit reached up to 14 per cent, oil surged almost 25 per cent, and gold witnessed a 15 per cent jump. As we stepped into 2020, the outbreak of the coronavirus epidemic did rattle financial markets.
While the spreading disease has already affected some sectors, a great deal of uncertainty remains over the eventual impact on global growth. How is the global economy looking despite the obvious market headwinds?
The answer can be broken down to three simple reasons. For starters, it was the change of direction by top central banks led by the Federal Reserve, and a worldwide flurry of rate cuts. Secondly, strong consumer and a resilient labour market on both sides of the Atlantic helped.
Finally, China stimulated its $14 trillion economy, which accounts for almost a third of global growth each year, thus aiding this strong performance.
As of December 2019, US equities rose 30 per cent in 2019 compared to a 4 per cent drop during the previous year. It was the same story for the US real estate market, which also grew by 30 per cent last year.
In general, global equities grew a substantial 25 per cent, following an 11 per cent drop in 2018. This reflected a positive shift in momentum in the US economy.
If we look at any major asset class, the trend was exceedingly positive. Take Brent crude, gold or emerging market equities, they grew by 23, 18 and 16 per cent, respectively, following a negative trend the year before.
It is with the above facts in mind that we look forward to 2020 with some cautious optimism. There are limited recession risks stepping into this year. This is thanks to the trade truce between the US and China, an orderly Brexit, as well as monetary policy support across the globe.
On the coronavirus, the epidemic is so far contained, and the recent support by the People’s Bank of China through cash injection and interest rates cuts should perk up that economy.
Watch the bottomline
However, what concerns us is sluggish global growth, impacted by uncertainty. Subdued economic and earnings growth may result in low returns on assets, especially following last year’s stellar financial market performance, where valuations look stretched across asset classes.
That said, it will be a year of two distinct halves - the first-half should see a continuation of 2019 with great performance, while the second-half is expected to see greater volatility as markets enter the thick of the US election cycle. Additionally, de-globalization will be one major theme, as more talks over trade and re-negotiations of existing agreements reflect rising protectionism, and thereby increasing risks.
There are several potential challenges on the horizon, too, if we look carefully. The upcoming US elections could bring about unsettling changes, as could the fear of renewed trade disputes with China or Europe, or a coronavirus epidemic which goes uncontrolled.
Soothing trade tensions
The signing of the phase-one trade deal between China and the US is indeed a good sign. However, the macro backdrop remains challenged, with decelerating global growth and rising debt levels. Having said that, the overall sentiment from the US to China to the GCC is neutral to positive, which is a good sign.
While it is too early to judge the full implications of the virus, it is likely to affect the global economic value chain in the short to mid-term.
And that brings us to the question: What does the 2020 outlook mean for regional investors? In 2020, investors should expect lower returns on their assets. Following the stellar performance of financial assets in 2019, several asset classes now sit at relatively high valuations.
Furthermore, economic growth is expected to remain muted throughout the year. Thankfully, central banks in the region plan to remain supportive and extend the economic cycle, thereby allaying fears of a recession.
Overall, in this low-yield environment, generating a high and sustainable income stream is challenging. Therefore, it is important to allocate portfolios towards equities, and to some higher yielding credit alternatives. Fairly valued equities, and stock of companies that are likely to pay dividends in a sustainable manner should remain on investor radars.
Gold, for instance, which had a stellar performance in 2019, should still play a valuable role in diversifying portfolios, in a cautious manner. Having said that, risks to the 2020 outlook remain, and vary from the coronavirus threat, to the US elections, to a possible renewal of trade rhetoric. To hedge against rising uncertainties, investors should stay well diversified across asset classes and across regions.
If we look at the GCC, economic diversification efforts should provide stability to growth. While oil-related rise saw a sharp deceleration in 2019 owing to production cuts, global economic slowdown and geopolitical tensions, the non-oil sectors expanded at a rapid pace across the region, driven largely by heavy spending in transportation, energy and logistics infrastructure.
In fact, the World Bank estimates the GCC region will grow by 2.2 per cent in 2020, recovering from the lows of 0.8 per cent growth estimated for 2019. The stabilization in oil prices, ongoing spending on mega projects and non-oil sectors are expected to support GDP growth. On oil, while the coronavirus remains a threat on oil price stability, the impact on demand is thought to be more of a short-term nature.
In the UAE, Expo 2020 should boost the tourism sector, and in Saudi Arabia, Vision 2030 should bolster construction and infrastructure investments. Moreover, an improved foreign investment environment is likely to attract global investors. In a nutshell, GCC economies are in good shape with relatively low debt levels and a strong fiscal position, and should continue to benefit from structural reforms intended to drive non-oil growth with more foreign investments.
Take the US market. While it currently enjoys a strong labour market, a resilient consumer, an accommodative Fed, and its dividend paying stocks and consumer stocks look attractive, the elections in the second-half of the year cloud the outlook. While the macro view on major regions is neutral to positive, GCC enjoys a positive outlook.
This is down to low and attractive valuations, fiscal spending and economic diversification, which should drive growth, and, of course, the Expo 2020 and Vision 2030 in KSA.
In essence, this year will expectedly see its fair share of challenges, and continued volatility. However, the investment outlook, especially for the region remains upbeat.
Despite growing uncertainty, we have every reason to believe that 2020 will be a relatively good year for investors, barring unforeseen event risks.
- Vipul Kapur is Head of Mashreq Private Bank.