Outlook 2020 - A straightforward year? - Falcon Private Bank
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MARKET OUTLOOK 2020 | MARKETING MATERIAL*
Outlook 2020
A straightforward year? Editorial Board
Is global economic growth accelerating or even a US
recession to be expected in 2020? Thanks to central
banks standing by, we expect the former to unfold,
Daniel Egger, MA, CFA, CMT
Executive Director
Chief Strategist
maybe after some turbulence in connection with the
Middle East conflict heating up. Tomas Hilfing, MSc, CEFA,
CAIA
Page 4 Executive Director
Senior Investment Manager
Cryptocurrencies’ 2020 will be driven by market leader
Bitcoin which is undergoing a halving event in May.
Considering the regulatory headwinds, this year is crucial
Aroun Dupuis, MSc
Director
Crypto Investment Specialist
as mass adoption has not been reached. We remain
positive as long as the all-important support above USD
6,000 is not breached.
Page 8
*
This document is intended for marketing purposes.
Falcon Private Bank Ltd. Pelikanstrasse 37 P.O. Box 1376 8021 Zurich Switzerland +41 44 227 55 55 falconprivatebank.com 1
MARKET OUTLOOK 2020
Overview
2020: Factors to watch
What is the outlook for global economic growth, inflation,
and central bank policy? Which factors could derail the
cautiously optimistic macro-economic outlook?
Page 4
Asset Class Outlook
Read our short and concise reports on the specific asset
classes and their likely drivers in 2020.
Page 6
Quick Access
Equities Page 6
Fixed Income Page 7
Currencies Page 8
Commodities Page 8
Cryptocurrencies Page 8
In Focus: The Gulf Region Page 9
Asset Allocation Outlook
How do we see the potential and risk of the different asset
and sub-asset classes? View our suggested allocation in
table form.
Page 11
2
FALCON RESEARCH
We expect the US presidential election in November 2020 to
make its imprint upon the market. The elephant in the room
will be the question whether the US-China trade war that is
smouldering underneath the surface of a 'phase-1 deal' could
push the US economy into recession.
Dear Reader,
For many investors, 2019 was a successful year. The turbulence of late
2018 was soon forgotten by market participants and the Fed’s U-turn
away from tightening the monetary screws had very positive effects on
equity valuations as well as fixed income yields.
The MSCI All Country World Index 2019 return of more than 25%
somewhat disguised the fact this result was achieved after the dismal
Xavier Clavel Q4 of 2018 when global markets tanked by a double-digit performance
Head Private Banking, figure.
Products and Investments
The outlook for 2020 appears straightforward: Thanks to central
banks permanently pushing the monetary accelerator, some market
observers expect more of the same, i.e. a continuation of the equity
bull market. Bond yields remain in check as inflation has not (yet?)
reared its ugly head. All good, therefore?
The overarching topic in 2020 is whether a U.S. recession in late 2020
or early 2021 will happen or not. If not, expect another decent year for
equities. Should more clouds appear – for instance in the form of rising
Daniel Egger inflation rates and at the same time slowing consumer demand – one
Chief Strategist must brace for another period of instability and rising risk aversion. We
remain vigilant, as by July of 2020, the US business cycle will go into its
12th year.
Best wishes,
Xavier Clavel Daniel Egger
3
MARKET OUTLOOK 2020
2020:
Factors
to watch
Global economic growth
After a year of slowing global economic growth, the average) devalued currencies supporting export demand
outlook for 2020 presents itself in a more positive light as and very low levels of inflation, which give EM central banks
some important leading indicators signal a stabilisation ample room to further stimulate the economy. China, EM’s
or even some improvement on the macro-economic front. elephant in the room, has seen its December Composite
The latter may be seen as the result of global central banks’ Purchasing Managers’ index jump to the highest level in 9
easing stance. In late 2018, less than 40% of central banks’ months, boding well for the coming quarters. Trend growth
latest interest rate decision was a cut, whereas today, rates of close to 5% p.a. in EM economies currently contrast
the percentage stands at above 85%. Plenty of monetary with trend growth in developed countries that lie below
tailwinds, to conclude. 1.5% p.a.
There are a number of headwinds which weigh on growth, World economic sentiment and GDP growth
primarily the US-China trade war, which to us only appears
to be superficially resolved, with major issues (intellec-
tual property rights, market access, government subsi-
dies) continuing to simmer. For the time being, the 'phase
1 deal' appears to be going forward, but one must brace
for years of a low- to medium-intensity conflict. Globalisa-
tion therefore is now in retreat. While regional cooperation
efforts in some areas appear to be bearing fruit, the net
effect in our view will be slower structural economic growth
going forward. The trade war will remain a negative for
Emerging Market (EM) economies. However, a silver lining
can be made out on the horizon, among others the (on
Source: Wellershoff & Partners. As of December 31, 2019.
4
FALCON RESEARCH
Global inflation Central bank policy
Considering the direction of global bond yields in 2019 having We do not expect any meaningful change to the current
reached all-time lows on average, inflation fears seem gone setup. The patient (the global economy) appears to be
for good. Market expectations for future inflation have dependent on the monetary crutch for a long time to
diminished as well and reached a new low for the eurozone in come. Only in the case that inflation were to rear its ugly
2019. EM inflation, measured as a GDP-weighted average of head, the situation would need to be re-assessed. As we
national inflation rates, has slid to the lowest level since data discussed above, central bankers would actually love to see
started being collected in 1990. With a level of just above 3% inflation moving above certain thresholds, therefore we do
p.a., the disinflationary forces of globalisation have had an not see many risks stemming from central bank policy for
overproportional impact on EM in the past year. On top of this, financial markets in 2020.
macro-economically prudent policies were put to work in a
number of countries, reducing inflation pressures thanks to a Current Policy Rate versus Real Policy Rate
better allocation of resources.
The end of inflation, therefore? We are not convinced of such a
conclusion, as 2020 may see some reflationary forces coming
Current Policy Rate 0.00% -0.75% 0.75% 1.63% -0.10%
back to life. First of all, based on our assumption that the
global economy is about to accelerate, the resulting increase Real Policy Rate -0.73% -0.50% -0.72% -0.14% -0.30%
in demand should exert upward price pressures, although Source: Ned Davis Research. As of January 6, 2020.
probably not in too strong a manner. Secondly, commodity
prices’ (energy and industrial metals mainly) base effects Longer-term, we fear that stealth debt monetisation
will drive up headline inflation rates in 2020. Third, and maybe by central banks (as being undertaken by the BoJ, the
overlooked by many, global central banks are craving for ECB, and again the Fed, to name the most prominent
some higher inflation rates, considering the many allusions to ones) could undermine the very foundations of finan-
'symmetrical inflation targets' by the Fed, ECB, BoE and other cial markets. We take the view that the turn towards this
major central banks. has already been taken, with higher and higher doses of
monetary morphine necessary to keep markets and econo-
What will drive inflation in 2020? Commodity prices will be mies afloat. However, the process can take years and will
important, and producer prices of late have been contracting only come to an end when the formulation 'global stagfla-
on average, so in the first quarter, we do not expect any tion' is passed around.
meaningful acceleration in consumer prices. As the year Number of Central Banks in easing mode
moves on, depending on the level of economic activity, and Number of Central Banks in easing mode
in particular on the decision by important eurozone countries 100 600
90 550
(read: Germany) to embark on fiscal stimuli, inflation could 80 500
become an issue to talk about rather than to act upon (in the 70 450
case of central banks). However, with so many false starts 60 400
50 350
in the past decade, many observers will give any meaningful 40 300
acceleration in price levels the benefit of the doubt. Short- 30 250
er-term, that is over one or two years, this could even be 20 200
10 150
considered positive for financial markets as real rates would, 0 100
in such a case, be pushed further into the negative zone, 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
supporting equity prices further.
Percent of central banks whose last rate change was a decrease
MSCI All Country World Index
Source: Bloomberg/Ned Davis Research. As of January 3, 2020.
Inflation: Developed Economies versus Emerging
Inflation
Economies
14%
12%
10%
8%
6%
4%
2%
0%
-2%
1997 2000 2003 2006 2009 2012 2015 2018
Developed Markets Emerging Markets
Source: Bloomberg. As of December 31, 2019.
5
MARKET OUTLOOK 2020
Asset Class Outlook
Equities
After an exceptional year of 2019, when global equities posing a risk to global equity markets as recession fears
added more than 25%, what may be expected for 2020? (via a feared oil shock) would then be elevated.
It is worth noting that earnings growth slowed down in
If one takes the view that 2019 was largely a rebound from a
most developed markets in 2019 and still, equities had an
weak 2018 and calculates the combined two years’ perfor-
excellent year. One of the primary reasons for the equity
mance, world equities gained 14.7%, i.e. an annual return of
market surge has been the monetary policy support in
just above 7%, about the historical average.
developed markets, partly thanks to inflation still being
low. The latter is allowing central banks to stimulate the Thus, we expect that the overall economic environment will
economy, something we do not expect to change this be supportive for equities and expect returns for 2020 to be in
year. the high single digits, likely with some increased volatility in
the US, due to the higher valuations there. Europe seems to
Other reasons supporting the equity markets are related
have stabilised for now, but political uncertainty prevails in
to the US–China tariffs discussions seeming closer to a
many places. As valuations are cheap, we suggest a neutral
resolution, and that US President Trump will do everything
in his power to support the economy (and no impeach- Equity Index
ment is expected), while Brexit is going to happen at the Global versus Emerging Market Equities
end of January 2020 (although still with an uncertain 120
outcome). Another positive for equities is the fact that 115
they pay attractive dividends on average, having become 110
some form of an alternative to bonds - as long as earnings 105
are somewhat stable, that is, no recession is to take place. 100
On the other hand, valuations compared to history are 95
high, especially in the US. The 2019 reporting season has 90
not yet started, so we must wait and see whether corpo- 85
rate results are confirming analyst estimates. Further- 80
Jan.18 Apr.18 Jul.18 Okt.18 Jan.19 Apr.19 Jul.19 Okt.19 Jan.20
more, the tensions in the Middle East, which have been MSCI All Country World Index MSCI Emerging Markets Index
rising as of late, can push oil prices significantly higher, Source: Bloomberg. As of January 6, 2020.
6
FALCON RESEARCH
quality, cost and availability of credit has a major role to
play in sustaining economic expansion.
When yield curves flatten, the profitability of the banks’
traditional business model of borrowing short-term and
lending long–term is curtailed, thus dampening the insti-
tutions’ incentive to issue credit. Peak credit creation, in
turn, slows economic activity and increases the probability
of recession. The described scenario is exactly what played
out through 2019, driving nominal yields in all developed
markets to near-term lows as future inflation expectations
globally remained anchored. We would expect the lower
rate trend to continue throughout 2020 given the undis-
puted trajectory of decreasing credit creation.
Corporate spreads globally (both IG and HY) are priced
for perfection. Peak profits, peak margins and peak de-
levering are significant headwinds to credit investors for
2020. Deteriorating credit fundamentals coupled with
aggressive, debt-fuelled share buyback activity are a toxic
combination when paired with slowing economic growth.
The deteriorating trend in credit quality is conducive to
the beginnings of a mass negative ratings migration in
2020. We expect credit spreads in both IG and HY to widen
materially in the coming year.
Emerging Market spreads are generically driven signifi-
weight in these markets. We continue to like Switzerland due cantly by the strength/weakness of the USD vs. EM local
to its more defensive sector composition. We are currently currencies. Therefore, in order to have a strong conviction
neutral on the Emerging Markets overall. Positive factors, that EM bonds will deliver outsized performance for 2020,
such as the currency devaluation of the past years leading one would need some conviction that the USD will weaken
to a strong export position for many an emerging economy which, to a certain degree, we have (see 'currencies'). We
and the lack of inflation pressures giving central banks the expect EM spreads to somewhat widen throughout 2020.
possibility to further accommodate the economy with a lax Real yields remain negative in many places
monetary policy, abound. However, some negatives such
Real yields remain negative in many places
as the record level of US dollar borrowing by EM corporates, 12
together with the unresolved trade conflict between the US 10
and China, refrain us from taking a too positive view. A lot
Real yields (%, Headline CPI)
8
will hinge upon the direction of the US-dollar as EM equity 6
relative performance typically is negatively correlated with 4
the trade-weighted dollar. 2
0
-2
Fixed Income -4
-6
The direction and level of interest rates are simply a 1982 1988 1994 2000 2006 2012 2018
US Germany Japan
function of the market’s expectation for future economic Source: Bloomberg. As of January 6, 2020.
growth and inflation. On the growth front, the banking
industry plays an important role in the development and
growth of the economy through an efficient distribution of
credit. The banks provide credit to various private/public
production sectors of the economy for the expansion
of their businesses and/or the consumption of which by
extension expands the aggregate economy. The quantity,
7
MARKET OUTLOOK 2020
Commodities Currencies
What to expect for the newly started year? As commodi- The all-important question in global currency markets (as
ties are purely driven by supply and demand and each of every year) is: what will the US-dollar do? With the trade-
them trade in - at best - only loosely connected markets, weighted dollar (DXY) having gained in 8 of the past 10
it may not be too meaningful to make a broad commodi- years, it would probably be prudent to continue to expect
ties forecast, but rather to do so for individual sub-markets a stronger greenback. We, however, do not share this view.
where some informed assumptions can be made. After years of reckless fiscal deficits in the order of 4% of
GDP and (despite the presidential rhetoric) an increasing
Precious metals, and especially gold, should continue to do
trade deficit (3% of GDP), the yield advantage will not be
well in 2020, assuming a weaker US dollar, continued low
enough to prop up the dollar, we feel.
interest rates and ongoing geopolitical tensions. In any
case, they should be part of a well-diversified portfolio. A weaker dollar would be positive for many EM currencies
Industrial metal (copper, nickel, aluminum) prices are and via suppressing import inflation rates could start a
dependent on the global economy picking up speed to virtuous circle for many currencies that offer significantly
make a major move in the near term – or a supply shock, positive real rates. Commodity-producing countries such
such as long-term strikes in copper producing Chile. We as Canada, Australia or Norway could profit as well from
are unsure whether a significant economic acceleration rising commodity prices which typically accompany dollar
will take place in 2020, and are therefore rather cautious weakness.
on industrial metals. Metals that help support the environ- The one imponderable, once again, will be the euro. With a
ment such as Platinum (catalytic converters) or Palladium Spanish government finally formed, political risk stemming
(fuel cells and catalysts), however, can still be attractive: from the Iberian Peninsula appears covered. What is
their increasing use is currently supported by environ- happening in Italy, however, where January could already
mentally friendly governments’ legislation. Furthermore, bring further grievance for the embattled anti-Salvini
oil prices had been quite stable around 50 – 65 US dollars. coalition, remains the wild card. From an economic stand-
Considering that fracking (hydraulic fracturing) 'break- point, i.e. without the risk of a major standoff between one
even' levels are currently estimated to be around 50 US major debtor country and its eurozone partners, the euro
dollars per barrel, enough supply will be available as long should revalue significantly.
as crude prices stay above these levels. Any issues in the
Middle East can move oil prices up quickly though. We do Cryptocurrencies
not envisage a significant price increase, unless military
intervention happens in this region. So far the US has not With the long crypto winter in 2018 seemingly ended, market
shown any interest to start a new war abroad (rather the participants in early 2019 were hoping for a better year.
contrary), especially not during an election year. Although in the first half of the year, the market thrived
Gold and Oil and brought up memories of the great bull market of 2017,
Gold and Crude Oil with total market capitalisation printing a year high at USD
1700 85
384 billion, it declined steadily during H2 2019 to eventually
1600 75 bottom out below USD 180 billion in mid-December.
1500
65 After having reached a year high at USD 13,796.49 on June
1400 26, Bitcoin gradually lost its lustre towards the end of 2019 in
55
1300 the low 7,000s, not far above the all-important USD 6,500/
1200
45 USD 6,300 support level. However, it still delivered a clearly
35 positive year-on-year return of 92.20% and accounts for
1100
close to 70% of the total cryptocurrency market cap. There-
1000 25
Dez.15 Jun.16 Dez.16 Jun.17 Dez.17 Jun.18 Dez.18 Jun.19 Dez.19 fore, it is not surprising to see that the crypto market evolved
Gold Crude Oil (WTI) very much in pace with BTC. Altcoins suffered in sympathy
Source: Bloomberg. As of January 6, 2020. with Bitcoin’s fall, which for many left behind a sour taste.
8
FALCON RESEARCH
BTC was running the show in 2019 and most likely will keep One of the key assumptions for a positive price development
on doing so in 2020. In May, BTC will experience another on the market was the crypto adoption from institutional
halving event. This means that the reward for mining a new investors. However, it seems that this never materialised.
block will be halved, so miners receive 50% fewer bitcoins Market participants had been hoping (wrongly) that the
(from 12.5 to 6.25 per mined block) for verifying transac- U.S. Securities and Exchange Commission would allow the
tions. This reduces the supply of new coins, so prices could first BTC ETF on U.S. soil, and that the entrance of Fidelity
rise if demand remains unchanged. The development of the and Bakkt would boost demand for BTC. This has not been
hash rate (put simple: the amount of electricity consumed the case, and mass retail adoption – key to long-term
for mining, i.e. the transaction verification mechanism) will success – remains feeble, in spite of all the technological
be important to watch. We expect the demand to remain progress made.
strong ahead of this major event.
Our medium- to long-term view remains unchanged; we
Since July, the altcoin market experienced a continuous expect the total market cap to remain above the USD
decline, coupled with a loss of interest from investors. This 180-200 billion level and BTC to consolidate above USD 6,500
lack of attention is not due to technological development support (worst case: USD 6,300). We expect BTC to perform
as many improvements and updates were implemented positively in H1 2020, at least until the halving event. Altcoins
into the leading protocols. Investors are still waiting for the should follow the route traced by its leader in the absence of
killer Dapps to be developed. On the other hand, central- specific news.
ised protocols like corda and hyperledger have been used
in different proofs-of-concept and showed that these two Total Market Cap Cryptocurrencies
Crypto
centralised blockchain concepts can be a potential alterna-
tive to decentralised blockchains. 1'000
At this point, the ultimate use case for cryptocurren-
100
cies is both as a means of payment and a store of value.
Facebook’s Libra project was supposed to be ground-
Billion
breaking, seen to haul in private money on another scale, 10
plus billions of potential users with it. However, Libra has
most likely faltered, with many politicians raising concerns 1
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regarding the project. Moreover, many central banks have
started their own experiment and are discussing the case for Total Market Cap
a central bank digital currency (CBDC). We expect CBDC, a Source: Coindance. As of January 1, 2020.
stable coin by definition, to be a major topic in 2020.
In Focus: The Gulf Region
After lower than anticipated GDP growth in 2019, we expect A solid pick-up in bond issuance was observed in 2019, with
the Gulf Cooperation Council (GCC) economies to show close to USD 96 bn, roughly 25% above the previous year’s
modestly stronger economic growth in 2020, primarily due figure. Bonds are gradually replacing banks as a funding
to a lower average oil price and rising geopolitical uncer- source in the region. We estimate that about 70% of corpo-
tainty. OPEC+ output restrictions, led by Saudi Arabia, are rate funding is financed via bonds nowadays. Secondly,
likely to extend through mid-year at least. These produc- GCC bonds’ inclusion in the major EM bond index has added
tion cuts should act as a positive catalyst to oil prices and crucial technical support, with the region now accounting
therefore to the Mena region as a whole. While Gulf banks' for roughly 18% of the index, potentially leading to fresh
fundamentals are still dependent on government spending, inflows to the region of roughly USD 50 bn. Lastly, govern-
the banking sector consolidation in the UAE as well as major ments will continue with diversifying their economies by
events such as the Expo and the G20 meeting in Riyadh are implementing fiscal reforms. We believe the defensive
supportive factors for 2020. Equity Markets in the GCC will characteristics of GCC markets, i.e. generally lower volatility
be driven predominately by single factors, such as Kuwait's and smaller drawdowns, will continue to provide opportuni-
MSCI inclusion, the increase in UAE foreign-ownership limits ties in the current environment.
and Aramco's domestic listing. A strong IPO pipeline is the
result, supporting banks' non-interest income as margins
are being squeezed by low rates.
9
MARKET OUTLOOK 2020 Asset Allocation Outlook How to position for 2020 and beyond? See our suggested allocation in table form on the next page, with comments detailing our positioning. 10
FALCON RESEARCH
As per 07.01.2020 UW SUW N SOW OW COMMENTS
Liquidity
Fixed Income
Government
Corporates We can see only subpar returns for the fixed income asset class in 2020. For one, rates
remain close to record lows, while credit spreads remain at the lower end of the past
Emerging Markets
years' bandwidth. Due to a poor risk/return balance, we consider the yield levels in
the high yield space as too low considering the risk of significant spread widening in
the event of sudden economic weakness. EM bonds are very much dependent on the
High Yield trajectory of the US-dollar, while we are cautious on convertibles for the year after a
very strong 2019.
Convertibles
Equities
Developed Markets
United States We remain slightly underweight for valuation reasons and the heightened risk of ge-
opolitical shocks. US equities should get support by the presidential cycle (election
Europe ex UK & CH (EUR) years typically are good for equities), however valuations are stretched and earnings
growth estimates are coming back. European stocks are cheaply valued, with a dis-
United Kingdom (GBP) count of about 30% to the US, but some political hurdles (again) will need to be over-
taken. In general, we consider the risk/reward balance as neutral. The UK could profit
Switzerland (CHF) from Brexit as uncertainty should get removed soon, while Swiss equities continue to
shine due to their defensive potential. Japanese equities are suffering from significant
Japan (JPY) cuts to earnings estimates which is expected to continue, thus weighing on sentiment
in a market that is historically very cheap.
Pacific ex Japan (USD)
Emerging Markets
Gulf Cooperation Council
Asia We suggest a neutral weighing in Emerging Market (EM) equities. We still like EM
thanks to the relatively cheap valuations, especially on a cyclically-adjusted P/E basis,
Eastern Europe but the trade dispute continues to weigh on sentiment for the time being.
Latin America
Commodities*
Geopolitical tensions are one thing, constant demand growth (in an age of new en-
Oil ergy) in the order of 1% is another. Thanks to shale oil in the US, there is a strong floor
to prices, however fears of an economic slowdown could temporarily weigh on prices.
With the geopolitical turmoil on the rise, gold is well bid. Moreover, the negative real
rates (to be considered opportunity costs) which are the consequence of very lax
Gold
monetary policy will continue to let gold shine. Should inflation start to creep up,
expect another leg up in 2020.
Alternatives
Currencies*
EUR/USD Interest rate differentials, both nominal and real, have strongly narrowed, in effect weak-
GBP/USD ening the lure of the US-dollar. The odd political crisis in the eurozone could temporarily
weigh on the euro, however we deem it undervalued and contemplate buying into weak-
USD/JPY ness. The yen and Swiss franc remain portfolio diversifiers as they continue to act as safe
USD/CHF havens.
We expect BTC to perform positively in H1 2020, at least until the halving event. Alt-
Cryptocurrencies* coins should follow the route traced by BTC in the absence of specific news. We are
positive on cryptocurrencies in the medium term.
UW: Underweight, SUW: Slightly underweight, N: Neutral, SOW: Slightly overweight, OW: Overweight.
Views are not absolute, but relative within an asset class.
*
For commodities and for cryptocurrencies the benchmark allocation is 0%. An overweight means that we expect higher prices and underweight means lower price
expectations.
With respect to currencies, in case of a high conviction view on a particular currency, portfolios will be hedged accordingly.
Source: Falcon Private Bank.
11CIO MARKET OUTLOOK 2019 . JANUARY 09, 2019 | INVESTMENT RESEARCH
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