Investment Outlook 2020 Main asset classes

Main asset classes

More modest returns

Most asset classes showed a strong performance in 2019. Investors should not expect to see this feat repeated in 2020, although financial assets will likely continue to benefit from generally low yields.

While the trade war intensified and the global economy worsened, most asset classes showed a strong performance in 2019. This was largely due to the US Federal Reserve’s (Fed) sharp turn toward easing, which boosted investor confidence. Our forecast for 2020 is for most asset classes to deliver lower returns than in 2019. Even though we expect manufacturing to stabilize and trade tensions to abate, a number of factors will likely weigh on performance. 

The drivers that played a key role in financial markets in 2019 – geopolitics, economic momentum and central bank policy – will undoubtedly remain influential in 2020, but we are likely to see some of them change direction. Other factors, including corporate fundamentals and investor sentiment, will also be important. 

Economic momentum set to stabilize 

While we expect overall gross domestic product (GDP) growth to be somewhat softer relative to 2019, we forecast a slight acceleration of industrial production (IP). As our research has shown, there is a close link between IP momentum and financial markets. Better IP momentum tends to support risk assets while pressuring high-grade bonds.

More restrained central banks 

Our base global economic scenario suggests that monetary policy support will be less pronounced than in 2019. Our economists expect the Fed and the European Central Bank (ECB) to keep interest rates on hold, although the ECB’s quantitative easing (QE) program will continue. Reduced monetary accommodation is likely to limit returns on most assets. 

(Geo)political wild cards 

Forecasts regarding geopolitics are highly uncertain, but our base case is that the US administration will try to achieve some kind of trade deal with China. If successful, such an outcome would favor risk assets, especially Asian equities. However, the USA may face an unusually polarized presidential election campaign in 2020, which could harm investor sentiment. Conversely, a resolution of the Brexit uncertainty would support European risk assets and the GBP. Further flare-ups in the Middle East cannot be excluded, though a major military conflict remains unlikely.

Margin pressure intensifying 

US companies have achieved high profitability in recent years: subdued wages boosted profits as sales increased. Cuts in US corporate taxes also added to profits. Yet this “fairy tale” is coming to an end, and we expect margins to be subject to downside pressure going forward. While interest costs should remain subdued, labor costs are likely to continue to rise. Another factor likely to weigh on profitability is tariffs on imports from China, which have increased input costs for many companies. 

Valuations still favor equities 

However, relative valuations still clearly favor equities. Although the price-to-earnings ratio (P/E) of global equities has moved up slightly over the past year, the valuation of high-grade bonds has increased more markedly as real yields have declined. That said, given the various headwinds, we expect absolute returns on major equity markets to be lower than in 2019. 

Corporate leverage a risk for low quality credit 

Leverage of non-financial corporations has increased in recent years and, according to some measures, surpassed the levels we saw before the 2008 global financial crisis. However, debt today is far easier to finance given very low interest rates. Yet risks on lower quality credit have increased, in our view. We therefore favor intermediate credit risk, including various segments of emerging market debt.