What are the market prospects for 2020?
After a banner year for equities in 2019, what lies in store for markets over the course of the next year.
Next year we will discover whether all the stimulatory measures taken by central banks and governments this year paid off. In recent months we have lived through a blizzard of interest rate cuts and a range of measures to increase money in the system and stimulate new activity.
Japan and the Euro area continue with their quantitative easing programmes, buying state debt with newly created money. The US is injecting large sums into the money markets and has cut rates three times. Turkey has halved its high rates, Brazil and India have cut theirs and China has loosened capital requirements of commercial banks to promote more lending.
At the same time, most governments have made clear their wish to see faster growth and have, where possible, cut taxes and boosted spending. The US increased spending on a range of areas whilst continuing with the big tax cuts Donald Trump introduced early in his term as president. India has cut Corporation tax, China and France have cut some taxes and various countries have boosted spending.
The Eurozone has tried to stay within its debt and deficit controls, which has limited the scope of its stimulus measures. The new UK government has outlined plans for a fiscal stimulus. Markets would like more fiscal action from the Eurozone. Japan went against the trend by raising its consumption tax, which had a negative impact on sales and activity. It is now proposing substantial new investment and construction spending.
It looks as if the authorities of the main economies have done enough to avoid a general recession next year. It does not look as if they have done enough to trigger fast growth or serious inflationary problems.
There was a near-universal misjudgement by central banks at the start of 2019 that they could move towards an old normal by raising rates and shutting down special measures, which they had to change as the year advanced. We should see decent growth of 2% or so in the US in 2020, with the president demanding more and criticising the Fed for being too cautious.
We will watch wage inflation carefully, as were that to pick up the Fed would want to be considerably tougher than the government would think sensible. The Euro-area might achieve growth a bit above 1%, with a possible recovery in Germany as the year advances. Germany is the main country that could offer fiscal stimulus but has so far proved reluctant to do so. More bad figures might tip the balance of opinion within the coalition government.
The EU Commission President, Ursula von der Leyen, has more work to do to bring about a detailed and positive green programme. Her wish is to see a big increase in green investment and activity in the Eurozone to lead its growth.
China seems to be willing to settle for the official growth figure of around 6%. The People’s Bank of China has ruled out aggressive monetary actions and is hitting a target of around 8.5% for money growth in line with nominal GDP. There is much work to do tidying up bonds and loans from the old economy and financing the new economy and the private sector more effectively. Japan has had a reasonable year in 2019 but may slow down next year. The government is worried about this prospect and has announced a new fiscal stimulus package of spending. The UK, after a period of tight money policies, awaits a new Governor of the Bank of England who may give it new direction.
Overall, the prospect is for more of the same. Another year of growth a bit below trend, with continuing low interest rates and special monetary measures is a background for modest rises in asset prices and positive returns from most asset classes. We will watch out for any signs of inflation picking up too much which would trigger higher rates and a sell-off, or for signs that the authorities were losing their battle to keep economies moving forward.
For more information please get in touch 020 3504 8307 or email us at email@example.com
John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.