What’s in stock for 2020 for the global economy and markets? We see a big shift in the macro environment – as the dovish monetary policy pivot of 2019 fades as a key driver. Our 2020 Global outlook lays out our outlook on global growth – and more. It also features a new tactical asset allocation framework – with high-level directional views across broad asset classes and detailed views within – all scaled by our conviction levels. Our modest pro-risk stance is little changed, but we have made meaningful changes under the hood.
We introduce three new investment themes for 2020. The first of these: Growth edges up over the course of the year, picking up the baton to support risk assets. The unusual late cycle, dovish pivot by central banks has led to a dramatic easing in financial conditions. The impact of such easing on the real economy typically comes with a lag but has been particularly delayed this time as it has been partially offset by the protectionist push. See the gap between our Growth GPS (yellow line) and where we would expect growth estimates to be purely implied by financial conditions (orange line) on the chart above. What would challenge this outlook? If U.S. China trade talks break down, or protectionist pressures broaden and ratchet higher, it could undermine business and market sentiment, cutting short the growth uptick we expect.
Powerful structural trends are testing limits — and threaten to intersect with the near-term outlook and become market drivers. Rising inequality and a surge in populism have implications for taxes and regulation. Trade frictions and deglobalization are weighing on growth and boosting inflation. Interest rates are hitting lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real- world consequences, and affecting asset prices as investors start to pay attention.
This was the overarching backdrop for the discussions when some 100 BlackRock investment professionals gathered in November to debate 2020’s market outlook. Our outlook publication features key takeaways from these debates. Highlights include: how yields hitting lower bounds are prompting a rethink of the role of government bonds as portfolio ballast; the risk of supply shocks from deglobalization and climate change lifting inflation over time; the prospects for a pause in U.S.-China trade tensions; and the potential for divergent policy outcomes in the U.S. presidential election in 2020.
We also unveil a new framework for tactical asset allocation. The first step is understanding the current macro regime — and the likelihood of potential transitions between regimes. This is key, because different regimes have different implications for asset returns. We assess current valuations and incorporate the views of BlackRock experts. This results in a new set of views on broad asset classes for the next six to 12 months, as well as granular views within asset classes, including equity factors. We scale these views according to our conviction. Three overall takeaways: We are modestly positive on risk assets; neutral on global duration and cash; and see room for a cautious cyclical rotation. Under the hood, many of our calls on sub-assets have changed due to the shift in economic and market dynamics. For example, within equities we have downgraded the U.S. market to neutral, with concerns about rising political uncertainty around the 2020 elections. We have at the same time upgraded Japanese equities to moderately overweight, expecting Japanese companies to benefit from a global manufacturing recovery and domestic fiscal stimulus.