Investor headwinds and tailwinds going into 2020
In order to garner healthy results, investors must make most of inevitable opportunities that will be presented
A new decade is upon us, 2020 is here and it could well be a time when investors will receive some positive outcomes.
However, as is always the case, in order to garner healthy results, investors must make the most of the inevitable opportunities that will be presented. Mitigating risk is also essential.
There will undoubtedly be more headwinds on the way, which will likely weigh on growth and returns. Indeed, to my mind, investors will be faced with three key headwinds going into 2020.
First, the trade war between the US and China. The dispute between the world's two largest economies has seen global growth reduce to its slowest pace in more than a decade.
The ongoing potential for talks to break down would have grave implications for the US and Chinese firms, as well as companies globally with supply lines and customers in both countries.
If the global economy was to fall further, should negotiations ultimately fail, this would clearly have a negative effect on investor returns.
However, things may be looking up. Last week Beijing and Washington agreed the text of a phase one trade deal that will stop the introduction of new tariffs and lower certain levies already in place.
Indeed, according to the Trump administration, the "totally enforceable" deal will almost "double overall exports to China".
The preliminary trade deal between the US and China is step one in rectifying an imbalance of over $300 billion in commerce between the two economic powerhouses.
The second headwind investors need to watch out for is the uncertainty generated by the US presidential election. Of course, uncertainty is always inextricably intertwined with elections - something loathed by financial markets - due to various different outcomes.
However, this election is especially crucial. The principal reason for this is because whoever wins the keys to the White House will, in essence, be the CEO of the largest economy in the world.
Should Trump win a second term, we can perhaps expect more traditional policies, such as tax cuts and regulatory reforms.
However, should a Democrat claim victory, this will unlikely be the case. Democrat candidate Elizabeth Warren is particularly unpopular with many investors due to her criticism of big banks and big businesses, and she has also indicated support for a wealth tax.
In addition, in regard to the Trump impeachment saga, all signs point to the President being impeached on Wednesday. Although no impeached president has ever been removed from office in the past, no party of an impeached president has even won the subsequent presidential election.
Investors' third headwind going into the new year is the rolling issue of Brexit. Should the UK finally agree a withdrawal process from the European Union on January 31 2020, then the hard work truly starts.
Only at that point can the vital trade negotiations and talks over the future relationship between Britain and the EU earnestly get underway.
It can be assumed that this dialogue will be highly complex, arduous and contentious.
Furthermore, there is always the risk of a no-deal Brexit. If this occurs, then corporate investment and household big-ticket spending will, in all likelihood, be postponed until 2021 at the very least, within the most benevolent of situations. And, of course, Sterling would continue to be volatile.
As we can see, uncertainty will continue in 2020, impacting global investors. However, in contrast, these are the three main tailwinds I believe investors could benefit from next year:
First, possible fiscal stimuli. This is certainly the case in the UK due to the general election. In Germany, the largest economy in Europe, it appears the country may be loosening the purse strings. In Asia, Japan is planning a supplementary budget, whilst the US and China are already doing so. All of these actions bolster domestic and global demand.
Second, it is forecast that ultra-low interest rates are here to stay. This will provide support for stock market and credit valuations. It would appear that inflation will unlikely be an issue over the next few years, which should help to keep interest rates at the present low levels and boost demand for credit and consumption.
The third tailwind investors can expect in 2020 is the fact that the UK and other European stock markets look cheap. After 10 years of trailing behind the US, stock markets in Europe now offer value. Dividend yields are above those on Wall Street, and recent indications of an autumn downturn plateau in economic data imply that we may see a regional economic recovery in 2020, which could be headed up by consumer spending in France. That said, it must be recognised that a disorderly Brexit would indeed hamper this process.
The European banking sector would certainly benefit from renewed economic growth, helping to hike demand for loans and lessen the burden of non-performing loans on balance sheets.
This sector has been the predominant reason for the region's stock market underperformance against the US this year, and the sector that offers what could be the greatest opportunity if growth rallies in the new year.
When contemplating the headwinds and tailwinds in 2020, the most important thing is that investors remain invested. History has taught us that stock markets usually go up in the long-term. Furthermore, investors must ensure their portfolios are sufficiently diversified across asset classes, sectors, currencies and regions, to take advantage of opportunities and circumvent risks.
Nigel Green is founder and CEO of deVere Group. Views expressed are his own and do not reflect the newspaper's policy.
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