(Jan 31): Our base case is for the global economic expansion to continue in 2020.
Whilst we expect a mild improvement in earnings growth, the mature business cycle will likely limit the possible upside, so we expect moderate returns from equities.
We acknowledge the risks from being late in the cycle, but note that the financial imbalances and inflationary pressures that have been the most prominent causes of past recessions appear manageable:
• First, inflationary pressures are likely to build over time, but we expect this to be a slow process that has a long way to travel before becoming more concerning.
• Next, in terms of imbalances across major developed economies, such as rising levels of indebtedness on the part of individuals or corporates, we have seen some increases in risks as the expansion has matured, but, compared to the experience ahead of past crises, these pressures still appear moderate. They are somewhat higher in the US than in Europe consistently, with the US being later on in the economic cycle.
• Also, with respect to pressures building up in markets such as valuations in equities (looking at cyclically-adjusted P/E multiples), we have seen some multiple expansion this year. However, valuation levels do not look overextended, given the macro environment and easier monetary conditions and, when we judge risks to markets more broadly, they do not look as stretched as what we have seen in previous cycles such as 1999 (where equity valuations looked much more excessive than today) or 2006 (where housing and credit markets were showing signs of overheating well beyond what we see now).
In light of the above, we do not see a strong rationale for investors to assume a more riskoff position and we favour remaining invested in equities. That said, risks remain elevated, and at current low yield levels bonds may provide weaker protection in the event of an economic or market shock for cross-asset portfolios. We therefore believe investors may need additional tools to deal with these challenges — placing greater emphasis on their portfolio hedging and risk management strategies.
Shoqat Bunglawala is head of the Global Portfolio Solutions Group for EMEA and Asia Pacific
