The 2020 vision: Your guide to shares, politics and the economy

Our head of markets predicts all the big events of 2020 and discusses possible outcomes.

This time last year we asked if 2019 would take the BISCUIT, given the effects of Brexit, Interest rates, Sterling, China, the US, Inflation and Trump.

And, to a large extent, it has. 

Despite those concerns, even the embattled FTSE 100 has posted an 11% gain in the year to date, with the “Boris bounce” providing a late turbocharge.

Meanwhile, the US economy has been on a tear and the main indices have responded accordingly. At the time of writing, the Dow Jones is up 21% in the year to date, the S&P500 26% and the technology-laden Nasdaq index 32%.

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There are some strong reasons to believe that 2020 could get off to a strong start, given the market relief of the UK election result, continued loose monetary policy by the major Central Banks and with the US economy showing few signs of fatigue.

Thus, the central question is whether attitude to risk will be reducing – or whether the risks themselves will be reducing.

Those risks include

R e-election
E arnings
D ebt
U K
C hina/US
I ncome
N IRP
G rowth versus value

Re-election looks a distinct possibility for President Trump in November, in what could be a defining moment for markets. Nearer the time investors can expect a barrage of tweets from the present incumbent trumpeting the economic achievements of the country since he took office in late 2016.

Quite apart from the ongoing trade spat (see below), it is hoped that that loose monetary conditions and a robust consumer will continue, thus avoiding a recession in the world's largest economy. Economic growth in the US is expected to slow in 2020, with muted inflation (although wage inflation needs to be monitored) and the movement of the Federal Reserve to rate-cutting mode this year was designed to head off the potential of recession for the time being.

The canary in the coal mine will continue to be earnings, particularly in the US. 

There have recently been some weaker manufacturing data emanating from the States, but the acid test would come if the US consumer showed any signs of retrenchment. The US economy is highly geared towards consumer spending, so one area which is currently under scrutiny is the discretionary spend sector.

At the moment, the signs remain relatively healthy, but if consumer confidence indicators start to dip, or if companies themselves start providing forward guidance which is less than positive, there would inevitably be talk of recession in the world’s largest economy, which itself will ignite concerns elsewhere.

At the current and historically low levels, both individual and corporate debt is easily serviceable. If interest rates needed to rise, however – such as inflation unexpectedly picking up strongly – this would put pressure on repayments which would naturally lead to a higher level of defaults and bad debts. This is particularly concerning, as recently highlighted by the International Monetary Fund, in areas where “shadow banking” (loans away from the traditional banks) is prevalent, such as China.

The UK has been “uninvestable” according to a number of international institutional investors and has largely missed out on recent global rallies. In 2017, the FTSE 100 added 7.6% but in 2018 the decline was 12.5%. some of this underperformance has been mitigated following the Election result. With the UK having long been regarded as undervalued, could 2020 be the year when the UK has its moment in the sun?

The China/US talks will continue to dominate investment headlines until such time that an ultimate resolution of some kind is found. Even the "phase one" agreement has proved difficult to agree and the US President's recent additional volleys against the likes of Argentina, Brazil and France have added to concerns that the brakes could inadvertently be put on global economic growth.

In the shorter term, investors have taken comfort that a “totally done” phase one deal has been agreed, accompanied by a suspension of the additional tariffs which were meant to take effect on Sunday 15th December. This has undone concerns over the President’s recent comment that he would be comfortable if a deal could not be signed before the US election. 

It is difficult to say how far afield international investors may go in their hunt for income, but UK investors need look little further than the FTSE 100, which on average is currently yielding 4.5%. With no obvious catalyst for large scale interest rate rises on the horizon, this is likely to add to the attractiveness of what has been a market under pressure.

This is also subject to the usual caveat of dividend cover - we have seen a number of high-profile dividend cuts during the course of 2019.

By way of reminder, dividend cover is effectively the number of times the company could pay a dividend to shareholders from current earnings. Generally, a dividend cover of 1.5 or above is seen as perfectly acceptable, whereas anything below 1 is indicative that dividends are being paid from reserves, which ultimately is unsustainable, although by the same token the negative figure could be the result of an exceptional item which has reduced earnings, such as an acquisition.

As if to press the point home, the current predilection for a Negative Interest Rate Policy, or NIRP, across various Central Banks looks like continuing.

What could be interesting during 2020, particularly in leading Northern European economies, is whether they decide that NIRP has now had its day and represents as far as monetary policy can be used in an effort to bolster growth. If so, could there be a fiscal boost (such as tax cuts) from those economies traditionally opposed to doing so - such as Germany?

The Growth versus value debate has been gaining traction during the latter part of 2019 in particular.

Growth stocks typically outperform in the expansion phase of the economic cycle and have therefore not surprisingly beaten value stocks over the last decade as loose monetary policy and access to debt have fuelled economic expansion.

On the other hand, value stocks tend to come into their own towards the end of the business cycle or during periods of tepid economic growth, which are the reasons why the debate has more recently heightened.

2020 could be an interesting spar between these two investment themes, especially if concerns around valuations come home to roost following peak profit growth.

January will herald the onset of the full-year reporting season, with corporate earnings hopefully continuing the positive momentum of the previous quarters. Of equal interest will be any outlook comments or guidance, which could well set the scene for what could be a challenging year.

Of particular interest will be the index which could be the one to watch, either stock specifically or as a whole.

We are already seeing the reignition of a “Santa Rally” given the recent news - for 2020, the FTSE 100 could well see an overdue return to form.