InvestNow News – 20th Dec 19 – Harbour – Top 10 risks (and opportunities) for 2020
Dec 18th 2019
What a difference a year makes. When we sat down to write down the risks and opportunities for 2019, we were amid a sharp market drawdown. The US earnings season had raised concerns about an earnings recession, the market was worried the Fed was too hawkish and the trade war had injected fear into markets. Fast forward to today and earnings have been resilient, the Fed is on hold and the trade war, which did escalate during 2019, looks to be coming towards an end. Equity markets have delivered returns well into the double digits with S&P 500, MSCI World and S&P/NZX 50 all reaching historic highs.
Now, as we approach the new year with stock indices at a higher point, we also need to recognise that valuations are also at a higher point. The forward P/E ratio of the New Zealand market has increased from 18 times to 22 times 12 months forward earnings so far in 2019, and the global market has gone from 14 to 18 times. This is expensive in absolute terms, but when compared to bonds a healthy equity risk premium still exists.
We are also seeing early evidence of a positive uptick in global activity. While it is far from a synchronised global upturn, it is encouraging. We do not foresee aggressive interest rate cuts supercharging equity returns in 2020 but monetary policy should remain supportive. However, there are many events which can tilt the pendulum.
Here are the top 10 for 2020:
1. Will monetary policy find a friend?
Global economic policy uncertainty remains high. Will stimulating growth fall to fiscal policy in 2020 as monetary policy runs out of ammunition? Japan recently announced a fiscal stimulus package, equivalent to roughly 2% of GDP. Speculation continues that Germany may do the same to stave off recession. China, however, is likely to continue prioritising a reduction in debt/GDP.