The International Monetary Fund (IMF) cut its world growth forecast further for both 2019 and 2020 to 3% and 3.4% in its October World Economic Outlook update. “While we agree on the 2019 figure, we are slightly less optimistic for 2020, expecting a more modest rebound to 3.2%,” the report said.
“We believe that the decelerating trend in global growth observed since December 2017 should stabilise in the vicinity of potential growth, with global GDP growth around 3%. We think that accommodative monetary policy, reduced trade tensions and greater fiscal easing should support the macro-economic environment in 2020 as in 2019,” the report added.
According to the report, China remains the main engine of world growth (about one third), even though its growth rate will decline towards its potential growth rate, meaning that growth should be close to the 6% mark in 2019, and 5.7% in 2020.
The report explained that the trade conflict with the US is China’s major headwind, weakening the outlook in 2020.
The report also anticipated some stabilisation and rebound in manufacturing trends, with manufacturing PMIs that may have bottomed this year.
The report said that long term rates could stabilise close to current levels as long as the Fed is on hold; on that front, the CA Indosuez Wealth Management does not anticipate additional rate cuts at this stage in the US.
In this context, it said that the direction in long term yields will remain correlated to the macro-economic momentum and risk sentiment, with some seasonality to be anticipated.
The CA Indosuez Wealth Management anticipates the dollar’s strength to wane in 2020 towards $ 1.16/EUR, this should provide greater monetary flexibility and potentially attract capital flows to emerging markets.
It mentioned that it does not expect further tightening of credit spreads, rather, some widening in high-yield credit is likely, mostly in the US and more moderately in Europe.
“Investment-grade spreads should be supported by central bank policy and by investors searching for yield. We still anticipate some spread compression in emerging corporate debt,” according to the report.
Concerning the earning, it said that it expects mid-single-digit EPS growth in mature markets, and high single-digit earnings growth in Asia, with a positive view on China.
“Valuation multiples should be less supportive than in 2019, and could normalise in the US. Valuations are more supportive in Europe, China, and Japan,” the report said.
It added that this expected environment should continue to support rotation from bonds to equities and could drive episodic rotations into value and cyclical stocks.
“Investor positioning should remain pro-cyclical into the spring, but volatility is already very low and short volatility positioning is extreme. This trade could unwind next year, with greater volatility in equities and credit, notably in case the US 10-year rate were to break the 2.25-2.5% level, or as the US presidential election approaches,” according to the report.
The report expects that political uncertainty should indeed shift from Europe to the US election in 2020, mentioning that the global rise of social unrest in mature and emerging economies should be monitored as well.
The CA Indosuez Wealth Management predicts a 60% probability of the aforementioned scenarios happening, putting also alternative scenarios.
Giving 10% probability, the report talked about this first scenario stating a stronger than expected rebound in manufacturing data and inflation, leading to an unexpected surge in long-term rates, likely giving rise to an acceleration in style rotation, and an unwinding of low volatility and momentum trades, as in February 2018.
Talking about the second scenario, the report said there could be no rebound in manufacturing data, and industrial weakness could spill over into services, with GDP growth slowing below potential, causing job creation to slow, monetary easing to resume, equities to correct, and gold to spike. The report shows that this scenario has only a 30% probability of happeningw.