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2020 viewpoint: the year ahead

Graham Smith

Graham Smith - Market Commentator

The turn of a calendar year ought not to matter fundamentally to markets, but it probably does because markets are traded by people. Setting new targets – from fitness and wellness regimes to just spending more time with the family – is all part of the January scene and what people expect from the year ahead is important.


From the ashes of a soaraway year on world stock markets, 2020 has a lot to live up to. That may leave investors feeling somewhat uneasy about the next 12 months, knowing that markets rarely, if ever, travel up in straight lines.

That’s probably a good thing. When confidence in the future is universally high, so is the scope for markets to disappoint. Conversely the right conditions for a rally are often created when investors are more wary – as they overtly were in late 2018.

Over short term periods at least, shock events will retain their ability to trigger market moves. First up this year we have an uplift in tensions between the US and Iran, which is already having a range of effects on shares, commodities and gold. We can’t be sure about what comes next.

What we can do though is measure the general environment for markets – the “fundamentals”. While positive fundamentals in no way guarantee a prosperous year ahead, they can help to underpin markets when the waters get choppy.

Importantly, the fuel that has driven markets higher since 2009 is still in good supply. Interest rates are mostly ultra low or negative for the world’s major economies and, thanks to central banks being alert to the dangers of tepid global growth, quantitative easing – or something very much like it – is back in vogue.

In the US, Japan, the eurozone and the UK, central banks have all pledged to resume or extend their purchases of government bonds with newly created money in 20201. As well as helping to assuage recession fears, these purchases should help to keep government bond yields low, adding to the attractions of equities on a relative value basis.

That’s good, because corporate earnings growth slowed a lot last year, at least by comparison with generally elevated rates of growth in 2018. However, analysts are expecting earnings growth to rebound in 2020 and that shows up in the modest or, at least, reasonable stock market valuations.

It may have risen to record highs over recent weeks, but America’s S&P 500 Index still trades on about 20 times the earnings companies are expected to make over the next 12 months. That’s similar to a year ago and significantly below the peaks recorded in previous economic cycles2.

UK equities may have enjoyed an election bounce, but they’re still way off world averages when it comes to valuations. The MSCI United Kingdom Index trades on only about 13 times this year’s expected earnings. For equity income investors the UK retains its allure, with the broad market offering a dividend yield of around 4.4%3.

Other major world markets, including Europe excluding the UK and Japan, are rated somewhere between the US and the UK with price-to-earnings ratios for 2020 in the mid teens4.

Judging by our experiences in 2019, progress towards a resolution of the trade spat between the US and China will also be critical to the progress of markets this year. The achievement of a phase-one deal in December drove a relief rally in markets but it will be important the momentum behind talks continues.

Should trade worries fade over the months ahead, then markets may find it easier to refocus on some of the other positives. 2020 could be the year that sees governments more able to exploit ultra-low interest rates to counter risks to economic growth.

President Trump cannot afford to see the US economy slide in the year of his planned re-election – just as he cannot afford an unpopular war with Iran. More federal spending initiatives to accompany a possible further cut in US interest rates could well be on the agenda.

Meanwhile the shackles are finally off the UK government, which will be anxious to show that its chosen path to Brexit has an associated payout in economic growth terms. A boost seems likely from a combination of lower taxes, higher wages for the low paid and more spending on public services.

Calls for a fiscal stimulus in the eurozone have been growing of late, particularly since manufacturing growth in the region’s largest economy appears to have ground to a halt, and as its second largest heads for the exit.

In Japan, the ball is already rolling with Shinzo Abe’s government having announced last month its largest package of stimulus measures since 2016. The measures will be aimed at repairing storm damage, upgrading infrastructure and offsetting the effects of October’s rise in consumption tax5 .

So while matching 2019 will be a tall order, stock markets seem to have quite a lot to look forward to. How much of this has already been discounted in current share prices, only future history will tell. However, what we can say is the concoction that normally spells an end to rising prices – including conspicuous overvaluation and inattentive policymakers – remain notably absent from the 2020 horizon.

Tom Stevenson’s Investment Outlook

On 8 January, Tom Stevenson presented his latest Investment Outlook, which included a live Q&A. If you missed the live webcast you can watch it below or download the report.


1 Bloomberg, 08.10.19, FT, 22.10.19, Bank of England, 07.11.19, Bank of Japan, 19.12.19
2 Wall Street Journal, 03.01.20
3,4 MSCI, 31.12.19
5 FT, 05.12.19

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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