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Analytics, 20 January 2020

The Financial Markets in 2020: A positive outlook

Investors are likely to have finalized or working on their 2020 strategies, kicking the decade with a positive outlook, and the year with optimism. While the 2020 market outlook is positive, investors should be mindful of several risks, including geopolitics, trade wars, US – Iran conflict, US elections amongst others. We look at some of these drivers, risks and potential impacts.

Federal Reserve: In December, the Federal Reserve paused its interest rate cuts, leaving interest rates hovering between 1.5% and 1.75%, in what is seen as an appropriate decision to prolong the expansion of the US economy. The rates will keep falling under the Trump Administration.

Trade Wars: The United States and China are expected to make progress in resolving the trade war through several trade deals. The first, “phase one deal” has been signed on January 15, but there is still much to negotiate as nearly half of the tariffs remain in place. US trade tensions with France and Germany (and the European Union), and with Brazil and Argentina in Latin America have also carried into the new year. Resolving these tensions will lead to a pick of both the US economy and the global economy.

US Stocks: US stocks soared in 2019. In 2020, though the outlook is positive with hopes that resolved trade tensions will lead to the recovery of the ailing manufacturing sector, analysts predict a weaker rally than 2019. Several analysts, including Goldman Sachs’ chief global equity strategist Peter Oppenheimer, maintain that strong gains in 2019 were driven by valuation expansion which will lead to more gains in 2020. Furthermore, LPL Financial Chief Investment Strategist John Lynch is of the view that since in 2019 valuations drove stocks upwards, in 2020 earnings will lead the drive, especially helped by clarity in the US-China trade front which will motivate investments by companies held back by the trade war. The US labor market also remains healthy with strong consumer spending.

US Elections: One of the potential major risks to the markets, especially for US stocks will be politics. Americans will elect a new president in November 2020. How the market reacts will first depend on the winner of the Democratic ticket, who will challenge President Trump in the elections. That candidates’ fiscal and economic policies will be closely scrutinized by investors, who already know President Trump’s position.

US – Iran Conflict: Though this came unexpectedly, the outcome of the conflict will impact the positive outlook in 2020. While neither the United States nor Iran wants a full-scale war, that prospects cannot be overlooked. Escalating tensions in the Middle East or any resulting conflict is not good for the market. The assassination of Iranian al-Quds commander Qassem Suleimani and Iran’s initial retaliation against two Iraqi bases housing US troops already drove oil prices higher by 10%, the stock markets fell, and interest rates declined. Nevertheless, the view that neither side wants a war has since calmed investors and reversed the changes.

Investors hate uncertainty. And there is no situation uncertain than the threat of war. The threat of a full-scale war will linger in the minds of investors even though some believe that the economic impacts of a full-scale war will be modest if the history of past conflicts in the Middle East are to go by. Furthermore, the US is itself now a major energy producer; the US became an oil exporter in early 2020. But as Ben Carlson writes, the relationship between geopolitical crises and market outcomes is never that simple.

Brexit: Negotiations have dragged on for the United Kingdom’s exit from the EU. Not much emphasis has been put on how a hard Brexit would be for the UK and for the global economy. The UK remains a powerful economy, in terms of GDP measures and the Bank of England itself warned that a no-deal Brexit would be worse for businesses than the 2008 financial crisis, with an immediate economic crash where GDP will fall by 8% and unemployment rising to 7.5%. Implications of Brexit’s local disruption in the UK cannot be ignored by the global economy, in this age of interdependency. It’s time to tread carefully on UK investments as the reality of Brexit hits home.

Global Stocks: Growth trends are likely to favor overseas markets in 2020. The factors that play here include overvalued US equities, ballooning federal debt and falling rates in the US which will result in a strong dollar environment for international stocks.

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