Summary
Letter from the CIO'S
After enjoying stellar performance this year, moving into 2020, investors will increasingly ask whether the global economy will proceed towards a trade war-engineered recession or whether growth will stabilise at a low level and potentially rebound, meaning the cycle could extend even further. In our view, the retreat in global trade is causing a major change in the structure of growth, but does not point to a full-blown recession, especially at a time when cumulative loose policies are gearing up and a partial deal between the US and China is in sight. Monetary and fiscal policy combination, a prominent theme going forward, may extend the current cycle further. While the noise on trade-related issues will be high, a material escalation is unlikely given the upcoming US elections in 2020. However, the path for investors will not be linear. In the short term, market expectations for policy actions have gone too far and need to be adjusted. The adjustment process will drive volatility in bonds, with a bottoming out of core bond yields having already started, and re-rating in some expensive defensive sectors in equity. Beyond the short term, the trend is towards a more aggressive policy mix that could potentially reach “the next level” of unorthodox measures when the risk of recession intensifies. The result will be an extension of the credit cycle that could eventually end in an explosion, although it is unlikely to happen next year. In terms of investment strategy for 2020, instead of fearing a global recession, investors should focus on adjusting their portfolio exposure to the deglobalisation trend. They should also prepare for a mature and extended credit cycle, with higher liquidity risks.
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