What does 2020 hold for us?

As the year comes to an end we can easily say that few have expected equity markets to perform strongly throughout 2019. Most developed equity markets registered double digit gains despite the trade tensions and Brexit concerns. Political risk was high on the risk agenda of many, yet for multiple reasons, investors have shrugged off these risks to a certain extent. Positive returns usually make investors more optimistic about the future and as we are now in the final trading sessions of the year, many are hoping for a ‘Santa rally’ to take place.

Historically, investors have generated unusually strong returns during a seven-day trading period, starting with the year’s final five trading sessions and closing with the opening two trading days of the following year. For example last year, during this seven-day trading period the S&P500 jumped by 4% as the US Federal Reserve (FED) hinted that economic conditions may not support further interest rate hikes. It is no news that both equity and bond investors favour a low interest rate environment. This partly explains why 2019 has been so good to investors. Back in the final quarter of 2018, financial markets were dominated by negative sentiment yet investors left the pessimism behind the minute the FED changed its hawkish tone.

Based on this, a year ago, we wrote that 2019 could possibly be a good year for bond investors and those who shied away from fixed income assets during 2018, on the fears of higher interest rates, should consider adding to their bond exposure as pockets of opportunities were created during the selloff. All other things equal, low interest rates support asset prices as investors withdraw money from banks and invest money in riskier assets such as corporate bonds and equities. Improving demand pushes prices higher and reduces future income and dividend yield.

Looking forward for next year, we believe the US economy will continue playing a very important role in keeping the world economy floating and out of recession. Loose monetary policy or lower interest rates not only support asset prices but also encourage companies to borrow more at low interest rates. Emerging countries have been and will remain among the main beneficiaries of the current monetary policy which the FED has employed this year. In addition, if investor sentiment is by and large positive, the US Dollar may lose some of its strength, giving room for emerging market currencies’ appreciation. This results in favourable financial conditions in emerging markets which have over time issued hard currency debt denominated in US Dollar.

The most recent tweets from US President Donald Trump, about a possible trade deal between China and the US, should give Emerging Markets investors more hope during 2020, as investors hope the political conflict which has been running for almost two years, becomes less of a risk in the very near future.

Less political noise from the US-China trade deal will have a positive impact not just on the US and China but on Europe as well. Less political tension increases business confidence and investments. Large export driven economies in Europe should benefit in such an environment as trade tensions ebb and the Brexit saga comes to a close. Despite these risks, which had a negative impact on economic growth in Europe, European equities performed strongly throughout the year. While a more benign environment does not necessarily reflect in higher equity prices, we do believe that various market forces will be supportive of European equities in the years to come.

With former International Monetary Fund (IMF) Chief Christine Lagarde now heading the European Central Bank (ECB), investors do expect her to put more pressure and encourage European states to increase spending with the aim to boost growth. Previous central bankers relied heavily on monetary policy tools, which did elevate investor sentiment and asset prices, but were not enough to bring growth to desirable levels. During her first monetary policy meeting at the ECB, Madame Lagarde confirmed that monetary policy will remain accommodative, but also highlighted that confidence in European growth is on the rise. Less uncertainty surrounding Brexit and progress in US-China trade talks should encourage a change in perception towards European companies and sectors, some of which have fell out of favour with international investors.

In the UK, we expect listed multinational companies to perform well if political risks subside. These companies’ share prices are highly correlated to the economic and political situation outside the UK. Smaller and more domestic UK companies have their faith linked to the prospects of the UK economy. During 2019, smaller companies outperformed larger companies, and both set of equities may diverge even further if any group faces much higher political risk next year.

In the US, economic fundamentals have improved and are reflecting in higher employment and modest wage increases. The FED reduced short-term rates, which should continue effecting US consumers positively in the coming months. With positive sentiment across the US consumer, domestically-focused companies are poised to achieve improving financial results. On the other hand, large companies with international business may continue facing bigger challenges as a prolonged US-China trade war may hinder further investments. In addition, a tight labour market will add to higher labour costs and impacts companies’ bottom line.

However, investors globally will keep an eye on next year’s presidential election, which could be another market headwind. Yet, a weaker US Dollar, brought about by lower interest rates in the US and benign financial markets, will most likely boost both US and global growth. Such environment will be beneficial for global equities.

With this in mind, what should we expect from the bond market? For most of 2019, good quality bond prices and equity prices moved in tandem. This has been a dilemma for investors for most of the past decade and a subject of contention in the investment community. Low inflation and interest rates support bond prices and the longer we operate in a low interest rate environment the less likely that bond markets sell off. We expect that 2020 will not generate the same total returns we witnessed across bond markets this year. Capital appreciation generated the bulk of returns in bond markets this year. Next year income return will generally and likely be the main source of return. The search for yield will remain, however clients are encouraged not to take unnecessary risks to generate the same level of income some years back.

As is the case with other asset classes, bond investors should keep in mind that when global growth kicks in and inflation picks up, interest rates will follow. Bond prices will adjust to reflect higher interest yields. While we do not expect any sharp increases in inflation and interest rates any time soon, investors should keep an eye on economic figures and market expectations, which usually try and anticipate central banks’ next monetary policy move.

In 2020, it will be difficult to experience the same returns witnessed across both equity and bond markets during 2019. Many investors will not complain about the last 12 months. However, those who sold off during 2018 because of heightened volatility, failed to participate in 2019’s stellar returns. We can’t repeat this enough – investors who have a long term investment horizon should keep their emotions at bay and take advantage of market volatility. While investors should not expect high double digit returns in 2020, they should expect improving economic growth and less recessionary fears as central banks pledge to remain accommodative. Other countries, such as the UK, seem willing to increase fiscal spending to boost growth.

We wish all our readers a positive and prosperous year ahead.


Gabriel Mansueto is Head of Investment Advisors at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]