GLC 2020 Capital Market Outlook: Green Shoots Mark Modest Improvement for 2020

GLC 2020 Capital Market Outlook:

Executive summary

The current economic slowdown should come to an end in 2020. The global economy is showing signs (the so-called ‘green shoots’) that growth in 2020 should pick-up modestly, aided by a détente in global trade frictions and stimulative central bank policies. We see an economic environment where corporate earnings growth will be sufficient to support equity market gains. We expect that bond yields will remain low but have a modest upward trend, commodity prices will improve, and the U.S. dollar will weaken.

Global equity markets have moved sideways for 22 months (January 2018 through to October 2019) and are now breaking out to the upside. Equities are moving up in anticipation of improvement in the macro-economic environment into 2020. In contrast to 2019, where many indictors were slowing, these same metrics are starting to turn the corner, pointing to growth in 2020. The growth won't be robust, but it will at least be moving from a downward trend to a stable or upward trend. In short, what were headwinds in 2019 will turn benign or become tailwinds in 2020.

MSCI World Equity Index price-only chart shows periods of zero growth between 2010 and 2012, 2015 and 2016 and 2018 and 2019 separated by cumulative growth of 57% between 2012 and 2014 and 25% between 2016 and 2018. The index is currently exiting another period of zero growth.

Equity markets have already moved to price in a rosy scenario for trade, supportive global central banks and the expectation that the earnings recession will come to an end in 2020. While our full-year return scenarios leave room for further growth, equities likely require more time to consolidate recent gains (a 5 to 7% correction in equities would pique our interest) and greater evidence (versus just hope) that the clouds are indeed going to part in 2020.

Conversely, bond yields appear to reflect a degree of pessimism inconsistent with our base-case scenario of modest improvement. While yields have been in an uptrend since their 2019 lows back in August (making higher highs and higher lows), their attraction is more muted than if yields were currently moving toward the upper-end of their trading range (a 35 to 40 basis point move higher from Nov. 30, 2019 levels for Canadian sovereign bond yields would whet our appetite for more fixed income). 

Bottom line: Our current tilt to the defensive side of neutral (i.e., slight underweight in equities and slight overweight to fixed income) continues to offer exposure to participate in equity market growth without overreaching for risk.

  • Our 2020 Capital Market Outlook calls for high single-digit equity price gains, with select markets (Canada and Emerging Markets) capable of going slightly higher. Trade-, political- and geopolitical-related volatility is to be expected, with uncertain outcomes requiring a meaningful allocation to fixed income as a safe-haven investment.
  • Within equities, we recommend broad, diversified geographic and sector allocations. We recommend neutral exposure to Canadian, U.S. and International (EAFE) equities and an underweight to Emerging Markets.
  • For fixed-income investors, we recommend a neutral weight to sovereign bonds, offset by an overweight to investment-grade corporate bonds and underweight in high-yield bonds. Overall, we forecast a 1.5% total Canadian fixed-income return for the next twelve months. Importantly, fixed income remains positioned to deliver on its role as a risk-mitigation tool during bouts of risk-off sentiment or an outright deteriorating macro-economic environment. 
Bond yields have begun to rise, but GLC does not see bond yield increases being sufficient to negate a positive total return in 2020. Fixed income remains attractive as a risk-mitigation tool. GLC has increased their recommendation to a high-neutral weight with a base-case scenario calling for a total bond market return of 1.5% over the next twelve months. GLC believes the global economy is showing signs that global growth should pick up in 2020, aided by a détente in global trade frictions and stimulative central bank policies. Corporate earnings growth supports equities keeping our outlook constructive. However, valuations are elevated, and risks remain, so GLC has lowered their view slightly to a low-neutral stance.

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This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.