2020 investment outlook remains positive. Despite lower expected returns.
Low interest rates and a slowdown of the global economy are weighing on expected returns globally and in all asset classes. However, thanks to high risk premiums as compared to bonds, there are still attractive investment opportunities on the equity markets in 2020.
Global economic slowdown hardly impacts equity markets
Despite persistently low interest rates and weakening economic momentum, the heads of the monetary authorities in the US and euro zone, Jerome Powell and Christine Lagarde, continue to have a positive economic outlook. In fact, Mario Draghi, past President of the European Central Bank (ECB), explained in a speech that, overall, the euro zone is more economically successful, more structurally balanced, and more competitive than ever before.
These important developments explain the current record levels of many stock exchanges. The "big picture" may also help explain why the global economic slowdown has not yet negatively affected stock exchanges and why the outlook for equities for the coming year continues to be positive.
Equity markets in developed countries are experiencing strong growth
Let's take a step back and look at three important developments: First, the overall output of the global economy has increased more than tenfold since 1980. Asia has been the driving factor, but Europe, the US, and Japan have also been able to increase their economic output by around 700 percent. Equities in industrialized countries even exceeded this trend. The MSCI World Total Return grew by approximately 3,300% during the same period.
At the same time, increasing real incomes ensured that private consumption became the most important economic factor in developed countries. This has led to sustained positive economic momentum. Consequently, both the unemployment rate and cost of capital fell in these countries. In addition, the European monetary union is politically unchallenged, its disparities are smaller than ever, and it has broad popular support. It is entirely possible that this will one day once again strengthen the value of the euro.
Lower expected returns place investors in a difficult spot
Nevertheless, many underinvested investors remain skeptical. First, there are worries that governments and private households have accumulated too much debt. Second, there are continued fears that the trade war has initiated unfavorable developments that cannot be reversed. And third, because the future nominal expected returns fell for all assets classes almost everywhere in the world in 2019, many investors are asking the difficult question of where it is still possible to invest today.
For Swiss government bonds, we anticipate an average rate of return of 0.9 percent per year over the next five years, while Swiss money market returns remain negative. This low base limits the expected returns for all other Swiss investments. Over the next five years, investments in private equity and hedge funds are likely to turn in an above-average performance. However, those who are looking for positive returns on bonds over the next year will have to turn to emerging markets, convertible bonds, or high-yield bonds.
Equity markets offer opportunities in 2020
Even though the most conspicuous developments are falling interest rates, decreasing inflation, and lower expected returns and a zero interest rate environment with moderate growth in Europe truly represents a new normal, you shouldn't ignore that – relatively speaking – the risk premiums for equities, when compared to bonds, have rarely ever been higher than they are today. That leads to a unique, historically unusual opportunity for today's investors. In my opinion, seeing and highlighting this opportunity seems more promising than complaining about negative interest rates. In addition, the real decline in expected returns was, of course, lower than the nominal decline.
In conclusion, asset management will remain a challenging craft in the coming year as well. However, the investment outlook for 2020 is still positive. Particularly for investors who are willing to go against the grain with discipline and diligence. 2020 may very well prove the truism that not investing in a time of low inflation represents a greater risk than investing with discipline.