2019 will be remembered as the year that investors climbed a wall of worry, a year devoid of euphoria, where many commentators portrayed doom and gloom. 
In the markets, the most meaningful information arguably came right at the start with the US treasury’s volte face on interest rates giving markets some New Year cheer in January. In fact, the markets raced on early in 2019 retracing much of the weakness experienced in the final quarter of 2018 and the rest of the year has been quiet in terms of market moves by comparison.
That doesn’t mean the markets were becalmed, however, as we saw decent gyrations on the back of news flow throughout the year.
2019 will be remembered as the year where negative interest rates hit the big time with the entire German, Dutch and Swiss curves in negative yielding territory. Indeed, at the time of writing about $17trn of debt has negative yields including many corporates.
Much of 2019 was spent trying to dissect political machinations whether that be regarding the ebb and flow of the US’s on/off trade war with China. Closer to home the UK’s politicians meandered from one debacle to another. It is hardly surprising, against this backdrop of compound, complex, changing concerns, that businesses have been slow to invest and investors have been happy to sit on their hands.
2020 outlook
But looking to 2020 the picture is perhaps more accurately described as confusing rather than outright concerning. We will see as the year goes on whether or not the momentary inversion of the US yield curve in August really was a harbinger of tougher times, or whether such a transient flicker of interest rates will be brushed off by the global economy.
It is clear that manufacturing is in a recession and the question now is whether this will bleed into a broader economic malaise. Therein lies the challenge faced by policymakers. Now the longest economic upswing in history, this cycle is showing signs of reversing, with those countries such as China and Germany which are heavily dependent on traded goods and manufacturing slowing down particularly sharply.
Yet a decade of ultra-loose monetary policy, essential as it was in stabilising systemic financial risks and avoiding economic depression, has failed to break the deflationary threat and central banks are running out of ammunition. Little surprise then that the discussion has moved onto fiscal policy to support growth.
This is likely to extend the cycle: the economy will be slower for longer, interest rates lower for longer. This provides a powerful case for remaining invested and I would anyway urge you not to spend time predicting the timing of the next recession as it has rarely if ever provided a good foundation for investment success.
There is no doubt that greater political stability worldwide would help businesses and consumer confidence alike, but recent years’ twin themes of populism and nationalism show no signs of abating.
Any tentative signs of pro-globalist policies from one of the world’s major economies would provide a fillip to sentiment and, one hopes, to markets. That brings us back to the trade war between the two largest economies in the world, accounting for a combined two-fifths of global GDP, of which we can see the damaging effects clearly taking place… Both leaders need a deal to be done but both also like to be seen as tough negotiators and concessions will not easily be given.
A technical recession is not out of the question, of course, but given central banks’ and governments’ largesse post financial crisis, it is tempting to believe that one would be dealt swiftly by concerted monetary and fiscal stimuli.
As long as confidence didn’t crater too much between growth slowing and the policy response, then markets need not fall precipitously. This is because valuations of the equity markets, which have increased over the course of the year, do not look too elevated and, indeed, outside of the US which looks expensive, only a small correction would bring other developed markets firmly back into ‘cheap’ territory.
The same can be achieved, of course, via earnings growth. Within equities, we strongly believe that a balance of value, growth and quality stocks should be held. Many investors have thrown in the towel on value but as we saw earlier this month, any back up in the discount rate will have a disproportionate impact on highly rated growth stocks while value stocks, at near record low valuations, will benefit. Predicting the timing of such shifts is impossible and we prefer to keep a balance to give us more defensiveness in our portfolios.
We need to be alert to this in the year ahead.
The fractures in our world are deep and the headwinds are strong. However, fiscal easing positioned to meet the needs of aged infrastructure, an ageing population and accompanied by redistributive policies, alongside ultra-loose monetary policy, could ultimately stimulate growth and begin to eat into over-capacity.
It might take some time, but don’t write off inflation forever. With interest rates where they are today the argument for loosening the purse strings becomes compelling and almost certainly irresistible if economic activity slows further.
With uncertainty abound, we enter 2020 with the benefit of having reduced equity exposure on strength in 2019. We remain cautiously optimistic from here but are now neutral in terms of our risk positions after being overweight for much of the past decade.
Given the uncertainty over the political environment and growth outlook, it seems appropriate to keep portfolios well diversified to ensure that they are not unduly sensitive to any particular outcome.
James Klempster is director of investment management at Momentum Global Investment Management. The views expressed above are his own and should not be taken as investment advice.