The fog is clearing. There is light at the end of the tunnel after the difficulties experienced by the global economy in 2019. Caught between the overly hasty hiking of interest rates by the US Federal Reserve (Fed), the continuing China/US trade dispute and widespread geopolitical concerns, the global economy dipped and recorded its lowest growth rate since the financial crisis.
This situation now seems to be behind us, however. We are approaching 2020 with optimism as the uncertainty surrounding the main factors that were weighing on the world economy has been resolved. China and the US reached an agreement in the initial round of talks, for instance, while Brexit went ahead on 31 January and the central banks will continue to pursue their accommodative monetary policies ostensibly supporting the markets.
Global economic growth is currently stabilising and we now believe that it will pick up again and exceed the level of 3% in the second half of 2020. The emerging economies are growing at a far faster rate than the developed economies, and are continuing to drive growth globally. We expect growth to remain positive and stable in the developed countries, where it should continue to be sustained by consumption thanks to low unemployment.
Note that 2020 is an election year in the US and, in the race for the White House, Donald Trump could choose to adopt relatively extreme policies on trade with China or the European Union. This is in fact the main risk that we are building into our economic scenario for the current year.
The bond markets have been guided more by abstract factors than by actual facts. The improvements made in the fields that undermined them have reduced investors’ appetite for assets valued for their quality in favour of riskier assets like shares.
In this risk-on environment, European sovereign bond yields staged a remarkable recovery at the end of the year, at both the short and long ends of the curve.
Inflation is still far short of the 2% target set by central banks, and inflation forecasts for the next two years point to a rate no higher than 1.3%.Aykut Efe
In terms of monetary policy, the central banks have taken an ultra-accommodative path that they will have no choice but to follow, creating downwards pressure on interest rates.
In Europe, the ECB is showing unconditional support for the market through its asset repurchase programme, which it has restarted for an indefinite period. In our view, private debt has retained its appeal provided it meets the following conditions: a sound balance sheet, eligibility for the repurchase programme and low cyclicality. Our attitude towards US sovereign bonds is neutral.
The Fed has also done all it can to stabilise the money market, and its conciliatory discourse and Treasury Bill repurchase programme, which will be in place at least until the second half of 2020, reinforce our positive view of the short end of the US interest rate curve. Treasury Bills seem expensive, however, at the long end of the curve, and we prefer to stay cautious, as 2020 is likely to be volatile, especially at this end of the curve, given the continued doubts about inflation, trade and the US elections.
In the US, the currently stable economic environment, the Fed’s responsiveness and the negative net supply are favourable factors. That said, for 2020, the challenges posed by economic growth are particularly relevant to the credit markets as corporate balance sheets remain the weak link in this cycle. Ultimately, this is a time to be cautious, but not overly so.
In our opinion, we should maintain a credit positioning that allows us to take opportunities while remaining selective.
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