2019 Has Been Phenomenal Yet Uncertain
The S&P 500 index surged by over 27 year to date (as at 19 December 2019). And, the markets are easing into the Christmas season with attractive returns in pockets, but these returns did not come easy.
In 2019, the recession fears started to mount up, and market participants were bracing for a recession in 2020. Interestingly, the recession theme is out of context now completely with the majority of the participants expecting a steady lift.
This purported recession was accompanied by US-China trade war jitters, Brexit failures, and weakening economic growth across major countries. As a result, there were months when markets turned risk-averse and negatively yielding assets in highly rated bonds made a new high.
Safe assets including gold had a decent run in 2019, and gold futures were up around 15.1 per cent over the past year as at 19 December 2019. Meanwhile, we witnessed central banks going on the shopping spree for gold.
With much risk and uncertainty, leading to a sluggish economic growth globally, the major central banks across the globe adopted an easing stance, and in turn, interest rates came down significantly.
Falling yields across the safer global sovereign debts were the effect of rates coming down to some extent along with increased risk and uncertainty in the business environment that resulted in an unravelling of investor sentiment.
Low and even negative yields in safer assets/bonds is a highly concerning environment for people saving for retirement.
Now that phase one trade deal jitters between the US and China are muted for a while, and Boris Johnson has won the UK general election to move forward with much-awaited Brexit; the short-term headwinds for overall markets appears to be muted.
Despite President Trump’s impeachment, all three major indices in the US closed higher on Thursday, 19 December 2019. And, a trial to decide whether the President is going to be impeached is anticipated to begin in early 2020.
Deglobalisation & Protectionism
It might be your misconception, if you were to think that trade jitters are muted, in fact, the phase one trade deal between the two major economies, United States and China, could be one of many in the pipeline over the coming decade between other countries as well.
As such, the United Kingdom is vying for a trade deal with the European Union (EU) that would serve its purpose to leave the EU, which has taken three-long years! And, it is not completed still. With a majority in the pocket of Tory party presently, this time the hopes are higher to get the Brexit done with a trade deal that is balanced and unbiased.
In the US, tariffs on imported goods are rising, and Europe is voicing out opinions for more stringent immigration norms. These measures clearly point that deglobalisation and protectionism are likely to be a key theme in the next decade, if not a decade maybe in medium-term.
Looking at Australia, trade has been rising and trade surplus is running multi-year high. This is amid the ban on Huawei for 5G technology by Canberra. Early December 2019, Huawei pointed out to the possibility of job losses, if the ban stays.
And it is not just Australia. India, for instance, backed-off from a regional trade pact – Regional Comprehensive Economic Partnership (RCEP) that included South Asian nations, including China and Korea.
Australia has committed to RCEP in principle, and efforts are being made to finalise the signing of the agreement next year. Meanwhile, Prime Minister Morrison is set to arrive in India in a three-day visit in January.
Since World War II, the globalisation theme has played out very well. A number of nations have been benefitted, and growth in economies have sustained. However, this may be an opportune time to shift away from the much-hyped historical growth drivers – ‘exports and open markets.’
All of this has led to a point where geopolitical risks have now become a prime source of uncertainty in the markets, sentiments, investments and whatnot. As we grew so interconnected with each other in every stride of globalisation, the risks of this dependency grew along.
A large-scale integration of supply that is underpinned by a global supply chain and especially trade pacts helped to suppress inflationary pressures in advanced economies. In addition, discount-retail models on the back of warehouses and not stores (online retail) have added to the possibility of inflation suppressing pressures.
Moreover, it is not just Globalisation, Protectionism and Climate Change but an era that is likely to bring a new dawn to the world, like the 1980s, internet boom and World War II.
Bulls Taking Over S&P 500
In a research note by Fundstrat Global Advisors, the research firm forecast 10 per cent EPS growth for S&P 500 in 2020, giving a base EPS target of USD 178, while the firm has a year-end target of 3,450 for S&P 500.
It noted the recent slight recovery in purchasing manager indices and stated EPS growth is likely to help S&P 500 to gain upside like it did in 2009-10 and 2014-17. A fund manager survey by Bank of America has found that recession expectations have come down significantly, and expectations have improved.
Some risks perceived by the research firm includes a disruptive monetary policy, US yield curve inversion, next step in the US-China trade pact, EPS expectations not materialising, democrats winning the election and impeachment of President Trump.
Invesco has a forecast of nearly 2 per cent for the US economic growth with upside potential; however, this projection is dependent on better trade policy and reduced policy uncertainty that could revive private spending, business confidence, and industrial and manufacturing activity. Further worsening in these areas would add to downside risks.
The asset manager also believes that the monetary policy environment for US equities remains positive for the upcoming year. Although, valuation looks to be stretched, however, the firm also believes that valuation is not good predictors in the short term.
This coupled with low inflation, low-interest rate, weakening dollar, and asset purchase programs which are anticipated to be carrying, could add tailwinds to the US equities and investors should accept some volatility.
BlackRock is of view that growth would be higher in 2020, adding tailwinds for the risk assets, and it has a pro-risk stance for 2020. For US equities, the asset manager has a neutral stance, downgrading from overweight to neutral in December 2019.
The reasons behind this downgrade remain its concern around the upcoming elections that have a broader range of political outcomes that could move the sentiment and block any outperformance.
Forward EPS Estimated (Source: Thomson Reuters)
According to Thomson Reuters, the consensus full-year FY 2019 EPS estimate for S&P 500 stands at USD 165.36 (mean) with a SmartEstimate of USD 163.97, which considers weights for analysts’ ratings. Also, the full-year FY 2020 EPS estimate for the S&P 500 is USD 166.01 (SmartEstimate) and USD 171.58 (mean), and only nine ratings have been submitted as of now.
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