Foreword

In 2019, we highlighted three factors that would impact asset markets – the ongoing US-China trade tensions, a peak in US interest rates and a re-synchronisation to slower global growth.

Over the year, markets ebbed and flowed on the back of US-China trade tensions. The US Federal Reserve (Fed) embarked on a rate cut cycle and delivered three rate cuts before signalling a pause in October. Global growth is slowing, although the US economy remains in a better shape relative to the rest of the world.

In 2020, we believe that the following three themes are likely to persist (refer to the interview with our Head of Investment Fund Strategies, Ooi Boon Peng).

1. An extended global growth cycle

We believe that the global economy is in an extended global growth cycle and the US will enjoy its longest post-war expansion. A recession is not our base case. After all, household and corporate debt in the developed markets are under control and there is no risk of an asset bubble bursting which would cause the onset of one. This should potentially put a floor under risk assets. Signs of a stabilisation in global growth can further lift equities, particularly markets that are more leveraged to the global economic cycle.

2. The shift from monetary to fiscal

The room to ease monetary policy will vary across the developed and emerging economies. Given still positive (albeit low) interest rates, Asian central banks appear to have more wriggle room to cut rates. With already low interest rates in the developed markets and negative rates in Japan and Europe, the effectiveness of further monetary easing is in question.

Fiscal policy will likely matter more in 2020. The calls for fiscal easing have become louder. This is not surprising as still muted global growth, following an extended period of low rates and quantitative easing, is pushing policymakers to look for alternative measures.

While cuts in interest rates will boost local currency bonds, markets that can achieve an optimal mix of monetary and fiscal easing will be ones to deliver the most attractive returns to investors.

3. The moderation of US outperformance

The US economy outperformed the rest of the world in 2019. Unemployment rate reached a 50-year low in September. Wage growth has also been steady (circa 3%). That outperformance, however, has been moderating. If this in turn tempers USD strength, it could unlock the valuation opportunities in Emerging Markets (EM) and Asian assets. We note that earnings sentiment and growth in EM have been improving while earnings sentiment has been moderating in the US over 2019. Economic indicators have also been beating expectations in Japan.

The 2019 rallies in the equity and bond markets highlight the cost of staying on the side lines. While there will be challenges in 2020, the opportunities our investment teams see are detailed in the following pages.