(Forbes) We’re about to enter a new and exciting decade. 2020 is just around the corner, and it could very well be a year in which investors receive some healthy outcomes. However, as always, this will depend on if, and how, investors take advantage of the inevitable opportunities that will present themselves. It will also depend on if, and how, they mitigate the risks to their portfolios.
As investors, we should brace ourselves for more headwinds (which are likely to drag on growth and returns) than tailwinds (which enhance growth and help fuel positive returns). This should be expected given the late stage of the economic cycle and the geopolitical climate. To my mind, there are three main headwinds that investors need to monitor carefully in 2020.
First, the U.S.-China trade war. The dispute between the world’s two largest and most influential economies has cut global growth to its slowest pace since the 2008 crash. And there remains the near-constant potential for the current trade talks to break down. This would have severe knock-on consequences for U.S. and Chinese companies, and for all firms around the world that have supply lines and customers in both nations.
If talks ultimately fail and announced tariffs are rolled out, the world economy could fall next year by a further 0.8%. Clearly, this could negatively impact many investors’ returns.
Second, is the uncertainty created by the U.S. presidential election. Naturally, elections always create uncertainty — which financial markets loathe — due to various outcomes. But this one is particularly vital. This is because whoever wins the keys to the White House will effectively become the CEO of the world’s largest economy. It’s also one to watch closely, as the two sides’ economic policies are so far apart from each other.
Should President Trump win a second term, we could expect more traditional conservative policies, including tax cuts and regulatory reforms. Should a Democrat win, this is unlikely to be the case. Indeed, Democratic candidate Elizabeth Warren is unpopular among many investors because she’s a critic of big banks and corporations, and has signaled support for a wealth tax.
And third is the ongoing saga of Brexit. If the U.K. does finally agree on a withdrawal process with the European Union on Jan. 31 next year, then the hard work really begins — yes, it hasn’t even started yet — as only then can the critical trade negotiations and the “future relationship” talks begin in earnest. These are likely to prove extremely complex, onerous and divisive.
There’s also the risk that a no-deal Brexit plays out. Corporate investment and household big-ticket spending is likely then to be on hold until at least 2021 under the most benign scenario. The pound would continue to be volatile.
All in all, there’s more uncertainty to come that could affect global investors. So, what do I believe are the three main tailwinds for investors in 2020?
First are potential fiscal stimuli. From the U.K., this is a given due to the general election — it’s more of a question of the size of the fiscal boost. Germany, Europe’s largest economy, is starting to talk of opening the purse strings. Japan is planning a supplementary budget. Meanwhile, the U.S. and China are both already doing so. All of this supports domestic and global demand.
Second, ultra-low interest rates are expected to stay. This will support stock market and credit valuations. Inflation looks unlikely to be an issue over the coming few years, which should anchor interest rates at current low levels and support demand for credit and consumption.
Third, U.K. and other European stock markets look cheap. After a decade of lagging behind the U.S., European stock markets offer value. Dividend yields are above those available on Wall Street, and recent signs of a plateau of the autumn downturn in economic data suggest we may see a regional economic recovery next year, perhaps led by French consumer spending. It should be acknowledged that a chaotic Brexit would hinder this process.
A resumption of economic growth would directly benefit the European banking sector, helping increase demand for loans and reducing the weight of nonperforming loans on their balance sheets. It is this sector that has most accounted for the region’s stock market underperformance against the U.S. since 2019, and that perhaps offers the greatest opportunity should we see growth pick up in 2020.
As I wrote this time last year, investors should remain invested “because history teaches us that stock markets go up over the long term.” In addition, investment portfolios must be adequately diversified across asset classes, sectors, regions and currencies. This is the investor’s best weapon to capitalize on opportunities and sidestep risks. Here’s to a rewarding 2020.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
