This 2020 outlook somewhat resembles our 2018 and 2019 outlooks; in each of these years, the global economy managed to expand despite late-cycle worries. As this long cycle matures and risks to the recovery gather, this call becomes more difficult to make. This year, even as some areas of the global economy weaken, we believe that pillars of strength remain to see it through. The only way out of this challenging investment landscape is to move through it, relying on pockets of resiliency and opportunity as we go.
As investors make their way forward and seek to capitalize on these opportunities, many forces – including geopolitical tensions and lingering policy uncertainty – will present difficulties. As the differences between the more resilient areas of the economy and those that are less so become clear, investors’ ability to achieve their desired outcomes will depend on the quality of their decision making; in the absence of a uniformly rising tide, choosing where to invest will matter.
In light of our overall growth forecast, we continue to favor select risk assets. Our emphasis on the selection of risk assets is deliberate; although we believe global GDP growth will come in close to long-term averages, there are considerable regional and sector disparities.
We believe US economic outperformance will continue, although the outperformance gap between the US and other regions may start to shrink. Europe continues to lag due to cyclical and structural problems, but a catalyst could trigger improvement, especially in the second half of 2020. Emerging markets (EM) will be critical contributors to global growth; that said, we expect economic performance in emerging markets to be highly variable. At the sector level, relative strength in services will partly offset relative weakness in manufacturing. Consumer spending will partly offset a slowdown in business investment.
We recognize that there are significant risks to our base case outlook. Capital preservation will be a high priority in 2020; we’re building hedges to address a wide range of geopolitical and policy risks. But the risks to our outlook are not confined to the downside. Upside risks include the possibility that slowing growth could motivate fiscal stimulus in major economies. With that in mind, we’re watching five major areas of uncertainty in the year ahead:
- Geopolitics: What will be the outcome with respect to Brexit, trade tensions, Iran, US impeachment proceedings and more?
- Economic resilience: Can consumers sustain strong spending without resolution of trade tensions and a turnaround in manufacturing?
- Policy: Will the policy response extend beyond monetary intervention to include fiscal stimulus?
- Structural reform: Will the pace of reform pick up in emerging markets and in Europe?
- Elections: How will the outcome of 2020 elections in the US and elsewhere affect trade, policy and more?
Positive outcomes in many of these areas would likely benefit Europe and emerging markets, which have suffered from years of underperformance, even more than they would benefit the US – which has less room for improvement. As 2020 unfolds and uncertainty in each of these areas moves toward (or away from) resolution, we will issue additional commentary on the implications for investors.
As important as it will be to track these critical areas of uncertainty, we also believe it’s critical for investors to consider world-changing forces that pose substantial portfolio risk, which a one-year outlook may not capture. Climate change is one of these forces. As we look to 2020 and beyond, we believe that regulatory pressure and carbon pricing initiatives are likely to accelerate, impacting asset valuations and capital allocations. This, in turn, will motivate investors to consider and take steps to manage the climate risk embedded in their portfolios and evaluate the investment opportunities that a changing climate-risk landscape will provide.