Stockholm (Ekonamik) – Ekonamik had the opportunity to visit Amundi’s offices in Stockholm to hear about the outlook for 2020 from Fixed Income and Credit Strategist Valentine Ainouz and Head of Equities Kasper Elmgreen. While their focus overlapped as did many of their insights, one salient disagreement between the analysts was on the contribution of US politics to global economic and financial stability.
The Central Scenario
Both analysts agreed that the US economy is at the end of its longest cycle. “If this were a party, we would be nearing the end of it,” said Elmgreen. Ainouz expects the global economy to experience 3% growth in 2020, supported by a reprieve in Sino-American trading tensions, accommodating monetary policy and the stabilisation of economic growth in the USA, Europe and China, but also India, Brazil and Mexico.
Both analysts expect Europe to recover in 2020. The driver of this recovery, German woes, which were particularly fuelled by the trade war, seem to have bottomed out, leading to a more optimistic outlook for 2020.
Risks in the USA
Assumptions about the stability of US politics seemed to vary. Elmgreen was distinctively less optimistic for the USA than Ainouz. The Head of Equites expressed a stronger concern about the risk that dysfunctional US politics and policies represent for the global economy via geopolitics and international trade.
Free of concern for the stability of US policy decisions, Ainouz’s downside risks are firmly focused on the corporate debt market in the USA, but also in Europe and China. While neither of them forecasts a crash in that market, both Ainouz and Elmgreen highlighted the fact that the increase in corporate liabilities has not been used for investment purposes but rather for M&A and share buybacks, which might be a problem for future returns. These dynamics could threaten the solvency of firms further down the ratings spectrum. Other sources of concern in credit markets are the level of student loan delinquencies, which at 10.9% of outstanding debt has stabilised near the historical highs of 2012/2013.
From a macroeconomic perspective, Ainouz also highlighted the risks posed by the slowing down of the Chinese economy as well as the continued dependence of US GDP growth on consumer spending. Should any of those two variables underperform expectations, there is a danger that global growth will fail to match predictions.
Opportunities in Europe
Given the central scenario, Ainouz saw opportunities for investors open to acquiring further exposure to US duration, careful search for carry trades that continue to take advantage from the low rates in developed markets and in case downside risks materialise an appreciation in gold.
Contrasting with his bearishness about the USA, Elmgreen was hopeful for European equity markets. According to him, one of the main opportunities facing investors is to be found when growth strategies reach their peak, after which he expects investors to be best served to focus on value stocks. Asked what triggers investors might want to look out for ahead of such a market shift, the Head of Equities singled out a rise in PMIs, of which there seem to be some signs on the horizon. Once again, this shift is beyond the control of European leaders.
According to Elmgreen, the manufacturing recession described by downward trending PMIs was caused by the trade war. “The canary in the mine was the BASF profit warning in the Summer”, the head of equities noted, pointing to the timing coincidence between that announcement and the drop in PMIs.
When the late-cycle unfolds, Elmgreen expects fiscal policy to kick into supportive mode. As a result, the Head of Equities foresees sunny days for European infrastructure and constructions companies. Another bright spot in the dashboard is ESG, where Elmgreen sees European companies outpacing their American counterparts. If the end of trade war escalation matches the stabilisation of the German economy, 2020 may just witness a shift in equity leadership from the USA to Europe.
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