In many regards 2019 was a year of dislocation and disruption. For market participants the yawning wedge between stock market returns and economic growth illustrates one of these contradictions. 
Over the year, economic activity and asset markets moved in opposing directions as earnings growth flatlined and world GDP sank to below trend, yet all major asset classes posted handsome gains – a simple USD 60/40 portfolio delivering 17 per cent year-to-date.
The key questions investors should be asking as we move towards 2020 are: what led to this unusual divergence of growth and returns, and will the environment persist into next year?
In our view, three factors – a global manufacturing slump, heightened geopolitical tension, and easier monetary policy – were the hallmarks of 2019. Simply put, while manufacturing weakness and geopolitical uncertainty weighed on GDP and other activity data via capex, inventories, and confidence channels; policy easing dominated their impact on asset returns, squeezing up valuations on stocks, credit, and bonds alike.
Over the next 12 months, the recent recovery in economic momentum should gain traction, with global economic growth returning to trend by mid-2020.
A key assumption in this view is that trade tension, which contributed to the more febrile geopolitical environment of 2019, stabilise as the political calculus in Washington tilts towards preparing for November’s presidential election. Recent newsflow on a Phase 1 agreement between the US and China augurs well in this regard.
2020’s recovery in economic activity is expected to be more tempered than the bounce we saw in 2017, as the ingredients for a synchronised upswing in global growth are less fresh and pent-up demand less evident.
Equally though, downside tail risks have declined and the balance of economic risks for 2020 has shifted with some upside risks such as a recovery in corporate confidence and activity now more plausible. The net result is an economic outlook of a rebound in activity sufficient to provide trend-like growth and maintain high levels of employment, but not strong enough to stoke inflation and force central banks to rethink their accommodative policy.
This economic outlook is consistent with further upside to equity markets in 2020. While we acknowledge that stocks have delivered strong returns in 2019, we do not agree that all of the recovery in activity and easing of political risk is in the price already.
Equity returns in 2019 were entirely driven by valuations, but given where they started – immediately following a fourth-quarter sell-off in 2018 – valuations on global equities are now roughly in line with their long-term average.
A modest, mid-single digit rise in earnings in 2020, combined with typical dividends, would suggest upper-single digit global equity returns even without any heroic assumptions on margins or valuations.
Looking at the outlook for the UK specifically, the recent election result reduces political risk premia and supports an improving outlook for global growth and risk markets in the new year. It is also consistent with a gradual rise in global bond yields.
While the UK still faces uncertainty stemming from the upcoming UK-EU negotiations on the future relationship, this election result could be the first step towards a sustained economic and political recovery in the UK.
Our view on the UK equity market is nuanced. Higher sterling is a headwind for international stocks and hence we would expect the higher currency to be a drag on the headline UK equity market performance.
In contrast, there was a significant discount in domestic UK stocks to reflect political risks. Now, the removal of Labour policy risks (higher corporate taxes and potential nationalization) is a clear positive for domestic-oriented UK equities.
Overall, 2020 is setting up to be a year of growth and moderation. Growth in terms of the economy and earnings, but moderation in terms of monetary policy, multiple expansion and asset market returns. After the more febrile and nail-biting environment of 2019 this may be a welcome relief to many and could serve to slowly improve investors’ confidence.
John Bilton is head of global multi-asset strategy at JPMorgan Asset Management and Thushka Maharaj is a global multi-asset strategist. The views expressed above are their own and should not be taken as investment advice.