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Market Outlook - Get the investment intelligence you need

RAKBANK has tied up with Principal Portfolio Strategies to produce periodical investment intelligence publications to update its clients of current Investment market conditions, asset class performance and investment outlook. The objective of these publications is not to serve as an investment advice but as an independent view on investment markets

The global growth outlook remains weak, but is stabilizing. However, sustained improvement is required before markets can stop worrying about a recession. Some of the recession worries are psychological, given that we ended a decade without a recession for the first time ever! At the same time, the low level of economic growth prevalent since the financial crisis leaves less cushion to absorb a decline without dipping into recessionary territory. Especially when structural headwinds (mainly demographic) in China and a cyclical slowdown in India are limiting the growth thrust from EMs.

While trade and political concerns eased in the last 3 months, they aren’t gone. 2020 US elections could evoke nationalistic tunes, denting market sentiment. On the positive side, financial conditions are very easy, which should create a positive feedback loop for the real economy. The scope for more fiscal spending remains, particularly in Europe, but demands for fiscal to take over for monetary aren’t yet met.

Our economists have a base case US GDP growth of 2.0% in 2020. Their downside case has GDP growth contracting, and the upside case has GDP growing at ~2.5%.Encouragingly, the probability of recession stabilized after rising in Q2 & Q3 2019.

Global monetary policy remains accommodative and financial conditions are ultra-easy. While easier financial conditions should provide strong support, the trajectory of the economy is equally important. Growth despondency could even start tightening financial conditions through adverse effects on credit spreads, volatility and momentum to nullify the easing effect of rates.

Market-based inflation measures recovered in Q4 ’19, reducing the angst about sustainability of the current expansion. The global monetary policy pivot to significant easing should help growth, which should keep inflation expectations close to current levels. Our leading indicator has slightly higher readings going into 2020, if commodity prices stay constant. If they move substantially higher (10%+), inflation may start beating market expectations, a challenge for risk assets.

Risk positioning has picked up in recent months. Price momentum shows equities to be in overbought zone. Increased risk exposure in the books of systematic and risk-parity investors could lead to rapid shedding of risk, if growth or political disappointments hit markets..

Equity valuations have become expensive and are headed towards a euphoric zone. We are almost back to year-end 2017 valuation levels, finishing a round trip that included a noticeable compression in 2018 followed by an expansion of equal magnitude in 2019!  Expensive valuations imply a high probability of normalization, which in turn implies increased likelihood of a shallower return path in the years to come.  Thought another way: some of the 2019 return is actually a borrowing from the future years. Yet, not all markets are expensive. Several ex-US markets are still fair value or cheap, driven by low P/B ratios.  Within equities, relative valuation opportunities exist (Asia, HK-SAR, Singapore, Europe & Japan vs. US, small caps vs. large and Value vs. Growth) with a better risk-reward to most sovereigns and credits.

Corporate spreads are expensive, though they remain well supported by large chunks of negative yielding sovereign debt, synchronized global monetary easing, strong inflows into bond funds, and resumption of asset purchases by the  ECB.  While further spread compression looks unlikely (but we were proven wrong on this count in 2019!), a ‘credit event” is also unlikely in our base case unless the “R” word becomes a reality. 

For FX, the dollar is expensive. While interest rate differentials with the Euro area and JPY narrowed in 2019, US$ fixed income still offer attractive carry on an unhedged basis, likely keeping the greenback supported. A recovery in ex-US growth is almost a pre-requisite for the dollar to weaken sustainably, to help emerging market risk assets.

  • Growth fails to recover despite encouraging signs and much easier financial conditions.
  • Inflation accelerates putting in question the “Central bank” put of super-dovish monetary policy, tightening global financial conditions.
  • Political risks (global trade) rear up again.
  • Impeachment proceedings currently under way in the US could create unanticipated volatility.
  • Expensive corporate product valuations, which combined with extended momentum in risk assets, could lead to a sharp correction if growth disappoints or political risks flare up.

As of 31 December 2019. These are the current views and opinions of Principal Portfolio Strategies and is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events regarding particular investments or the markets in general. 

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This document has been prepared by Principal Global Investors for informational purposes only. The contents of the document should not be construed as an advice on legal, financial or regulatory issues. No person should rely on the contents of this document without first obtaining independent advice from qualified professionals. The National Bank of Ras Al Khaimah (P.S.C), its employees and consultants expressly disclaim all liability and responsibility to any person who reads this document in respect of anything done or omitted to be done by such person in reliance, whether wholly or partially, upon the contents of this document and shall not be responsible for the results of any actions taken on the basis of information provided in this document or for any error in or omission in this document.