Monetary PolicyJan 2 2020

Uncertainty still remains for 2020

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Uncertainty still remains for 2020

Much of the chatter in the beginning of the year, focused on the likelihood of a repeat of a 2008-like financial crisis. 

The good news for investors is that, while many in the industry fear a global economic slowdown, most do not think 2020 will culminate in a recession. 

So what is 2020 going to be about really?

US-Sino Trade 

Most in the industry caution that US-Sino trade tensions may still persist despite the phase one agreement signed on 13 December. 

Alasdair McKinnon, lead fund manager of the Scottish Investment Trust says: “Although we now have a ‘phase one’ trade deal, there will undoubtedly be more twists and turns on the way.”

Mr McKinnon adds: “The situation could change as quickly as President Trump can tap out a tweet.

"It remains to be seen whether there is much substance to that deal because China and the US looked to be some distance apart on a number of issues.”

But Bastien Drut, strategist at CPR Asset Management struck a more optimistic note and says: "The fact that a phase one deal has been reached between US and China should prompt the industrial sector to stabilise globally.”

In December China and the US struck the much awaited phase one of the trade deal. 

The agreement commits China to buying at least $40bn of US agricultural goods annually, tightens protection for US intellectual property rights and bans the forced transfer of technology from US companies. 

Mr McKinnon does acknowledge the importance the world’s second largest economy will hold in 2020. 

He says: “China’s deceleration, the huge slowdown in global automotive sales and the trade war have all depressed demand for industrial goods which has hurt export-heavy countries such as Germany.

“Looking forward, the biggest swing factor is likely to be the prospects for the Chinese economy, which is showing some tentative signs of stability.”

Going fiscal 

Many commentators believe that fiscal policy will be the biggest driver of change. 

Gregory Perdon, co-chief investment officer at Arbuthnot Latham & Co, says: “The $15trn question on investors’ minds is ‘has Quantitative Easing lost its mojo?”

Mr Perdon adds: “For this reason markets will be increasingly looking towards fiscal policy to carry the baton forward.”

He believes that QE was extremely beneficial at the beginning but “it is losing its efficacy today”. 

QE is a form of loose monetary policy, whereby a central bank purchases predetermined quantities of government assets in order to reduce interest rates. 

The European Central Bank and a number of other countries such as the UK and the US adopted QE post-recession. 

Mr Predon adds: “Of course the Fed and ECB will remain accommodative, but Mario Draghi always said, monetary policy without the fiscal can’t work in the long run and he is right.

"Ms Lagarde will certainly use her political skills to encourage Fiscal spend.”

The US Federal Reserve cut interest rates three times in 2019, indicating its concern over sluggish economic growth. 

Geoffrey Yu, head of UK chief investment office at UBS Global Wealth echoes this view. 

“With interest rates already close to, at, or below zero, the effectiveness of traditional monetary policy is now diminished. We're therefore now also considering the role of fiscal policy in stimulating growth.”

“Given a divided US Congress, Eurozone budget constraints, and China's concerns about managing leverage, meaningful fiscal stimulus in 2020 appears unlikely, in our view.

"But low inflation and interest rates do provide the leeway to take a fresh look at the role of government spending,” explains Mr Yu. 

He adds that coordinated fiscal and monetary action could offer material upside to our growth expectations, even if it might require a "mini-crisis" to force policymakers to reassess their current approach.

Mr Yu says: “The word recession is again being more commonly uttered.

"But we don't foresee this happening in the next year. Instead, we expect the story to be one of continued weak growth globally, at a rate of around 3 per cent.”

Brexit 

Friday 13 December, also led to the re-election of Boris Johnson as UK prime minister, a move which financial markets welcomed with both sterling and UK stocks inching higher. 

Most commentators feel the Jeremy Corbyn threat has been eliminated, and with that much of the uncertainty hounding UK markets. 

But the ultimate fate of the UK economy depends on which sort of trading agreement the UK and EU strike post December 2020, when the transitional period is due to end. 

David Holohan, senior portfolio manager at Mediolanum says: “The near term outlook remains challenging as both business and consumer confidence have been negatively impacted by the ongoing Brexit uncertainty.”

He adds:  “While the election outcome should result in an improvement in both measures, the durability of the bounce will be heavily influenced by the amount of progress on Brexit that the government can achieve over the coming months”

Mr Yu says: “Overall, the picture is one of sluggish growth of around 1 per cent for 2020.

"Last month's victory for Boris Johnson means we now have greater clarity over Brexit in the near term, which in turn should prompt a modest recovery in economic activity.”

He warns: “This phase looks set to be every bit as difficult as the last, with just over 12 months until the transition period ends on 31 December 2020.

"The prime minister has ruled out applying for an extension by the 1 July deadline, meaning no-deal fears could soon return.

“Therefore, the increase in business activity and investment will be limited. Finally, for open economies such as the UK, global weakness remains a headwind to a domestic recovery,” adds Mr Yu. 

saloni.sardana@ft.com