This article first appeared in The Edge Malaysia Weekly on December 30, 2019 - January 5, 2020

The global economy has grown at a slower pace this year amid market concerns that a recession could be around the corner.

In June, the World Bank Group forecast that global growth would ease to 2.6% in 2019, 0.3% lower than its projection made at the start of the year. In October, the International Monetary Fund projected that global growth would hit 3% this year, down 0.3% from its previous forecast. These growth numbers are the lowest in a decade.

However, slowing growth has not affected the performance of equities and bonds globally. Equities have extended their double-digit growth, while bonds have delivered high single-digit returns due to lower interest rates and trade war uncertainties. Gold prices have also rallied since the start of the year. What can investors expect next year?

Investors should tread carefully in a late-cycle economic environment, but there is room to be optimistic, says Manpreet Gill, head of fixed income, commodities and currencies at Standard Chartered Singapore.

His optimism stems from two factors. The first is high-frequency data such as the Purchasing Managers’ Index (PMI), which has stabilised and improved recently, indicating that the global economy could be returning to a growth path. “This may very well set us up for a much more optimistic outlook in the early part of 2020 than the growth gloom we have seen across most regions over the past few months,” says Manpreet.

The second is that central banks have signalled that they are prepared to lower interest rates and support growth, given the absence of inflation in most regions. Their willingness to lower rates further is in sharp contrast to pre-recession periods, he adds.

However, market volatility is expected to continue, mainly due to two events — the long-drawn US-China trade war and domestic politics in the US ahead of the 2020 presidential election.

Risk assets — specifically equities — are expected to outperform bonds next year, underpinned by a rebound in global growth. Within the bond universe, emerging market paper will be more attractive than [those from] developed markets, says Manpreet.

However, investors should balance their portfolios by allocating more money to insurance-like asset classes, mainly gold, he adds. “Gold continues to be our preferred hedge as we believe any rebound in bond yields is likely to be capped. It is also our view that a weaker US dollar in 2020 may add another tailwind.”

Karen Chen, a product specialist at Allianz Global Investors in Hong Kong, concurs that bonds are expected to look less attractive next year. She says bond prices globally rallied this year and a similar scenario is unlikely to be replicated going forward. On top of that, interest rates around the world, which are already at depressed levels, are unlikely to go lower.

“It is hard for bonds to match this year’s returns unless the US heads into a recession and that prompts the Federal Reserve to cut interest rates further. But this is not our base-case scenario,” she adds.

Chen says investment-grade corporate bonds with relatively attractive yields and high-yield bonds in Asia and the US are the bright spots in the bond universe. “The hunt for income will continue to attract investors to investment-grade corporate and high-yield bonds in the US and Asia.”

Hannah Anderson, global market strategist at JP Morgan Asset Management in Hong Kong, says investors will need a well-diversified portfolio to enjoy stable and positive returns in 2020. That is because economic and political uncertainties will likely cause the performance of various asset classes to rise and fall faster than usual. Such a situation has been observed in the past two years, she adds.

“The year 2018 was a weird one. Investors were not just ‘risked off’; they went off from markets almost altogether, and cash surged to be the best performing asset class,” says Anderson.

“In 2019, many of the same trends observed in the previous year — high uncertainty, slowing economies — were in place, but investors made their peace with such headwinds and got comfortable with making shorter-term bets. Such a focus is exemplified by the fact that the best-performing asset class year to date [as at December] rotated every quarter.”

The key to building a well-diversified portfolio is to look beyond present expensive valuations and carefully examine the role each building block plays in a particular portfolio. Investors should also identify where to balance short-term, risk-on rally trades with solid defensive cushions, she says.

The local market has underperformed this year. As at December, the FBM KLCI was down about 17% from its peak of 1,895 points in April 2018, while more than RM20 billion in foreign funds have left the country over the past two years.

But investors can take comfort in the fact that a lot of bad news has already been priced into the local market, according to Affin Hwang Asset Management Bhd managing director Teng Chee Wai.

On top of this, corporate earnings growth in 2020 could meet analyst expectations, depending on the performance of two key sectors, he says. “Earnings growth in the last five years have been negative, except for 2017. Analysts are expecting earnings growth of 5% to 6% in 2020. Is this achievable?

“It depends on the performances of the plantation and banking sectors. With crude palm oil prices starting to trend up in October, we should see decent earnings growth for plantation stocks as prices have hovered below RM2,000 per tonne for most of the year. It is currently at RM2,800 per tonne.

“Meanwhile, banks should post low to mid-single-digit earnings growth. Although the central bank is expected to cut the interest rate once next year, the recent round of [earnings] results [based on the last rate cut earlier this year] show that the rebound in the net interest margins of most banks is quite quick. Thus, we expect positive earnings growth for the market next year, although the quantum will not be high.”

Teng also expects large-cap stocks in general to outperform small caps next year as their prices have fallen quite a bit in 2019. Going forward, the key risks for the local market will be the ongoing trade war and upcoming US presidential election.

“The US-China conflict may continue to weigh on markets, even if a phase-one deal is likely to be signed. It is not a done deal and there are structural challenges involving sovereignty, intellectual property and technology transfer that have yet to be solved,” he says.

“The 2020 US presidential election will be a key event for investors to monitor. Trump may face possible stiff competition from billionaire Michael Bloomberg, who threw his hat into the ring for the Democratic presidential race. His political credentials as a former mayor as well as a moderate alternative to other more liberal candidates may shore up his appeal and bridge the divide.”

These issues and strategies will be discussed further at the Standard Chartered Global Market Outlook Forum 2020, titled “A Balancing Act”, on Jan 11 at Shangri-La Hotel, Kuala Lumpur.

The speakers of the event are Manpreet, Anderson, Chen, Teng and David Wong, senior investment strategist and head of Asia business development, equities at AllianceBernstein in Hong Kong.

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