“2020, Here We Go!”

Submitted by Michael Every of Rabobank

Welcome to 2020! We wish you a very successful year and hope that you will be with us throughout the year which is likely to be rather eventful. Before we look ahead, it is worth recalling that 2019 was the best year for global stocks since the financial crisis a decade ago. Investors who held their nerves during periods of high trade tensions between the US and China were handsomely rewarded. The S&P500 Index rallied 28.9%, the Nasdaq gained 35.3% and the Dow Jones Index was up 22.3%. All three indexes set new record highs extending the longest bull market in history for another year. That said, it will be very difficult if not impossible to repeat such impressive gains in 2020 if our non-consensus view on the US falling into a recession proves to be correct and if a trade truce does not last as we anticipate.

The Fed played a major role, as always, in supporting the markets. Under tremendous political pressure from President Trump, who even questioned whether Chairman Powell is a “bigger enemy” to the US than Chinese President Xi, the Fed made a U-turn and delivered three interest rate cuts. Content with its action, the Fed indicated that those insurance cuts should prove sufficient to foster economic activity – the notion our Fed watcher Philip Marey strongly disputes as he expects the US economy to fall into a recession by the summer of 2020. Philip, therefore, expects the Fed to slash rates all the way back to zero by the end of the year. Given that the Fed will be slashing rates when the US is already heading into a recession, we do not anticipate emerging markets to benefit from that as the positive impact of lower rates will be offset by rising concerns about the US economy.

Although the Fed provided the markets with major support, it was the prospect of a trade agreement that propelled stocks to record highs in Q4. The relationship between the US and China will remain a major driving factor for the markets this year as well. President Trump said that he will sign “our very large and comprehensive” phase one trade deal with China in Washington on January 15. He will also travel to Beijing “at a later date” to talk about phase two of a trade deal. While such a prospect will support the bullish momentum in stocks in the coming weeks or even months, we remain sceptical that a trade truce will last. Unless the critical issues that caused the conflict in the first place (intellectual property theft, forced transfer of technologies, substantial state subsidies and limited access to the Chinese domestic market) are properly addressed, China and the US will clash again. It seems unlikely that Beijing will agree to a reinforcement mechanism that would allow the US to interfere in Chinese policies. Should China agree to be closely monitored by the US whether it meets its obligations, trade tensions may escalate even faster.

The UK will start a new decade by leaving the EU on January 31. That said, it seems unlikely that the shadows cast by political uncertainty will abate this year. In contrast to PM Johnson’s confidence that a trade deal between the UK and the EU can be completed by the end of this year, recent comments from EU Commission President suggest an extension may be needed. Since the PM has ruled out a delay, the possibility of a cliff edge Brexit remains a threat. Another worry for UK investors is the outlook for growth. After a downbeat performance in 2019, the FT’s annual survey suggests that economists expect next to no improvement in 2020. This outcome will be accentuated if political uncertainty increases. It is already our view that the BoE may cut interest rates twice in the year ahead. The labour party leadership election will be an interesting sideshow for UK investors in the weeks ahead. A You-Gov poll is suggesting that Keir Starmer is the current favourite with Rebecca Long Bailey in second place. A Starmer leadership would suggest a move away from the far left, which could be more of a challenge for Johnson’s Tory party in the 2024 election. With MPs on holiday over the New Year period and the political landscape seemingly calm GBP/USD has drifted back about the 1.32 level. UK/EU trade talks will only start after the UK has left the EU on January 31, the pace and tone of these talk will set the tone for the pound into the spring.

In the EM space, it’s not an encouraging start to a new year for the Turkish lira, which is under selling pressure amid growing geopolitical risk. Turkey’s parliament is expected to authorise President Erdogan to deploy troops to Libya – a move that would worsen a proxy war between Russia and regional powers and would complicate international efforts to restore stability in Libya, which has been in turmoil since President Gaddafi was overthrown in 2011. The lira was the second worst performing EM currency in 2019 – only the beleaguered Argentine peso weakened more. We do not have high expectations that 2020 will be a much better year for the Turkish currency. The risk of the US imposing punitive sanctions on Turkey for purchasing the Russian S-400s remains high. The Erdogan administration has not addressed structural issues that in the past caused the economy to overheat, the current account deficit to rise substantially and inflation to accelerate sharply.