2020: Another year to invest with profits, although more discreet

2020: Another year to invest with profits, although more discreet

The returns will be lower than in 2019 but without threat of recession. Business profits will decline but the Stock Exchange will have its potential for valuation, especially the European one

The year 2019 has turned 180 degrees for investment. What had a traumatic beginning, under the threat of an imminent recession, is ending at the party, with the prospect that the worst of the economic downturn is behind and there is room to stretch the growth cycle for longer and with the two big ones fronts that have most disturbed well-directed investors. The United States and China have reached a ceasefire in the trade dispute that has put the global economy in check and in the United Kingdom the overwhelming electoral victory of Boris Johnson has finally settled Brexit's uncertainty. There will be separation from the EU on January 31, as promised by the winner of the elections.

The resolution of these two major sources of concern is amplifying the gains in a year already very positive for investment, antithesis of what suffered in 2018. While the tension between the US and China was coming and going in intensity, central banks They took care of taking the markets hand in hand. Its determined performance as guarantors of growth, returning to the rate reductions, has been the great engine of the rise in financial assets this year.

The stock market increase has not been supported precisely in the increase in business profits. In fact, by 2020 a deterioration in the profit margin of the companies is expected, without this time many more stimulus measures are expected from the central banks, almost to the limit of their forces. Does this mean that 2020 is going to be a bad year for investment? The managers and analysis firms agree that no, although they also assume that it will not be possible to repeat the bright earnings of 2019 next year.

“Our baseline scenario for 2020 is relatively favorable. We anticipate slow and steady growth, low inflation, an expansive policy and a single-digit profit growth. A recession becomes more of a problem by 2021, or even beyond, ”they point out from HSBC. The key to expecting another positive year for investment is in fact that there is no recession in 2020 and, predictably, not in 2021. Thus, in the next year, financial markets would not have to anticipate the end of the economic growth party. to the next exercise. This is also the idea that BBVA Asset Management also supports and with which it expects stock market increases of 3% for the S&P 500 and 10% for the Eurostoxx 50. Quite more modest, of course, than those of the year that ends.

No recession in sight

The continuity of growth is therefore assured by 2020, although with an intensity that divides analysts. Yes there is a coincidence that, as the commercial tension between the US and China subsides, the worst will have happened to the manufacturing sector, an idea that Christine Lagarde just pointed out this week at its premiere at the ECB.

Presidential elections in the US are a risk factor against Wall Street

In Goldman Sachs they point out that, after two years of slowdown in global growth, 2020 will be the time for a slight rebound, from 3.1% this year to 3.4%, even though the Chinese GDP will advance below 6%. "Our economists still think that the risk of a global recession or in the US will be reduced by 2020," the US bank adds. In Credit Suisse they clarify such optimism and point out that “the general growth of GDP will be lighter than in 2019, although we predict a slight acceleration of industrial production”. The Swiss entity therefore expects more moderate returns for next year.

From Jupiter Asset Management they have instead a more bleak 2020 vision. "We expect that macroeconomic data will continue to deteriorate around the world in 2020, which should force central banks to cut interest rates," warns Ariel Bezalel, head of fixed income at the manager. In his opinion, and despite the fact that the Fed has justified the three rate cuts of 2019 in a mid-cycle adjustment, “there are multiple pressures that suggest that the world economy is reaching the end of the cycle and many of them are closely linked to the Chinese economy, which has slowed considerably this year. ”

The warnings about the beginning of the end of the long economic growth cycle - the US entered the longest economic expansion in its history in July this year - are still there and the recent optimism that has unleashed a trade agreement between the US and China begins to be even cause for alarm for some. As Goldman Sachs warns, there is a risk that stock market rises are excessively motivated by investors' fear of missing the rise, beyond other compelling reasons and without much optimism about the background economic growth.

The US bank cites another important risk not to throw the bells on the fly and in which other firms coincide in their forecast of more modest returns in 2020. The margin of business profits would have reached this year ceiling and in 2020, although it is expected that these gains continue to rise, they will do so to a lesser extent due to rising wage costs, a trend that will be observed mainly in the United States.

Emerging assets offer the greatest potential for revaluation and are managers' favorites

Andbank warns of a deterioration in the margins of US companies: S&P companies will increase their sales 4.7% in 2020 but the rise in labor costs (2.7%) will not be offset by the growth of productivity (expected 1.6% in 2020). This is one of the reasons why BBVA AM sees for the first time in many years more potential in the European Stock Exchange than in the United States: with prospects for growth below potential, the rise of the Stock Exchanges in 2020 should occur in much by valuation and not so much by benefits And in terms of valuation, European equities have more travel than Wall Street. In addition, also for the first time in a long time, the US Stock Exchange could have the political factor against it in 2020.

Political risk, also in the US

In a year of presidential elections in the United States, which will be held in November, "the political risk could weigh significantly on the S&P 500," Goldman Sachs warns. One of his predictions for 2020 is precisely that US assets will not have the profitability leadership. "Everything indicates that the US will have a polarized presidential campaign for 2020," they add from Credit Suisse, where they also remember the end of the "fairy tale" that American companies have lived up to now, with lower taxes and moderate salaries that extended the profits while sales grew.

Thus, in full electoral countdown, Trump could be tempted to raise the tone of commercial tension with China if the economy and Wall Street blow in favor, while a Democratic candidacy - yet to be defined - of a more leftist profile could activate nervousness of investors.

Before the US elections, the UBS council is to diversify. The US technology, energy, financial and healthcare sectors could suffer volatility due to the risk of greater regulatory control. "It is preferable to opt for investments less exposed to the results of political decisions," he adds. A recipe that serves for the US elections, for trade negotiations and for the uncertain expectations of a fiscal impulse that will take over from central banks. The search for quality assets is the slogan given by UBS and Goldman Sachs by 2020. Specifically, the Swiss bank is committed to companies with a solid dividend, oriented towards consumption and a more domestic profile, less exposed to the volatile spirit of global trade.

In a world of zero rates, equities remain the majority bet, while sovereign debt, safe haven and a source of profit for a long time, becomes a less reliable asset in the future with which to diversify the portfolio, in opinion of HSBC. On the contrary, “market prices remain tempting for some classes of higher risk assets, such as European and emerging market stocks, and for parts of fixed income where the duration of the rates is not very high and yields are attractive, like Asian credit, ”says the British bank.

“Emerging fixed income is still our preferred asset, especially if we make the expected profitability analysis against the assumed risk,” added from BBVA AM. Without the threat of rate hikes in the US and in an environment of moderate economic growth, the emerging commitment is widespread in the face of the once again challenging task of continuing to obtain returns for another year.

THE POSSIBLE RISKS OF 2020

Excess complacency. The approach of the United States and China and the outcome for Brexit on January 31 have raised investors' optimism. No recession is expected in 2020 and even a rebound in growth by some managers, which could lead to taking excessive risk at a time when the economy remains weak and the business margin of companies is weakened.

Political risk Investors have become accustomed to living with political uncertainty, which will bring new episodes in 2020. With a definitive date for Brexit, a second phase is no less delicate in which the EU and the United Kingdom must define their future commercial relationship. The United States and China must continue to move forward in a trade negotiation full of obstacles and in which future economic leadership is settled. Y
The United States holds presidential elections, without it being clear yet who will be Trump's Democratic rival and if he will have a more leftist profile and less liked by Wall Street.

Central banks. The markets will not have in 2020 another wave of stimuli from the Federal Reserve and the ECB, which are barely expected to change their interest rate policy, except for some more rate reduction in the United States.


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