2020 investment outlook: This will be the year of change
Change will be the defining theme of 2020, but there are still reasons for investors to be cheerful.
This is an extraordinary moment for investors. Now, in early December, most types of investment, including shares and bonds, have delivered double-digit returns over 2019. The outlook for the world economy has even perked up a little. Yet, while this is undoubtedly a positive thing, it's not always reflected in the way people are talking about markets for the year ahead.
This is because 2020 is likely to be dominated by one overriding theme: change. From the aftermath of the UK’s December election, to new holders of key central bank posts, to the European Union leadership, to a potentially new US president, change is on the agenda as we begin the new decade.
All change please
Despite a slightly more positive outlook, that doesn't mean it's plain sailing from here on out. After all, the trade hostilities and Brexit process are still bubbling away. It's nearly inevitable that the market and larger economic environment will shift too.
Working with the investment teams here, we've identified some key conclusions as we look to the future:
Fears of a recession might have lessened, but global growth could still disappoint: If 2018 and most of 2019 were defined by a gloomy 'slowdown' in economic growth, the last few months have been a ray of sunshine for investors – employment levels have improved, as have consumers’ optimism about the overall state of the economy.
There are a few reasons for this. The US cancelled tariffs against China and the UK avoided a 'crash out' Brexit, both of which many had feared would damage the global economy.
But that doesn't necessarily mean that economic growth is about to be propelled to new heights. Even with a trade war ceasefire, it's unlikely that business investment will significantly increase in the short term. And if the UK secures a deal in the near future, there is still the issue of the future trading relationship with the EU to sort out.
Should people be paying even more attention to the US election? The race to the White House has already made plenty of international news but markets seem to be ignoring it as we go into the election year. But if there is a ‘blue wave’ and the Democratic party makes major gains, we believe there could be a major impact on US and global investments.
A shopping list of policies – which if enacted would represent a marked departure from ‘business as usual’ – include higher corporate taxes, expansion of healthcare provision and a clampdown on tech monopolies. Many of these would require Congressional approval but there is an underappreciated chance that Democrats could win the majority of Senate seats, clearing the path for their legislative agenda.
And in the event that Trump is re-elected, political volatility may still remain elevated. His administration has been less positive for markets recently as attention has turned to trade and foreign policy. Another four years of a Trump administration could easily mean more of the same.
You, me and ESG
People’s appetite for investments which incorporate environmental, social and governance (ESG) analysis will only continue growing in 2020. But while there is enthusiasm for this exciting area of investment, there is also still a lot of confusion.
Unlike ‘ethical investing’, which is about excluding companies from your investments because you may not morally agree with their business – say, tobacco businesses – ESG builds a more nuanced picture of how a company is run, from its approach to the environment to the quality of its auditors or how it treats its employees. Once investors have this picture, they can work out how well this company might be prepared for the future, or if it’s likely to run into scandals or regulatory trouble.
We’ll be working a lot more on ESG next year as well so watch this space to see the results of our research into thousands of companies.
Happy new year
Drawing all this together, it is clear that the complexity and interconnected nature of global markets means that investors need to look not just across borders but also across all types of investment. But while change is on the horizon, we’re not pessimistic. So long as investors manage their risk, there are still plenty of reasons to be cheerful in 2020.