2018 was the year USD “cash” outperformed almost every asset on the planet.
Cash has done well again in 2019, but, unlike last year, cross-asset returns have been a veritable bonanza.
Thanks to central banks’ coordinated pivot back to “market support” mode, stocks have surged and, happily, bonds have rallied too. After all, the very factors that prompted policymakers to pivot (i.e., decelerating growth and falling inflation expectations) are bullish for bonds. Meanwhile, lower rates reinvigorated the hunt for yield and the prospect of more accommodation has raised the odds that the cycle can be prolonged, setting the stage for a rally in credit. And, of course, the proliferation of easy money policies, falling yields and lingering geopolitical uncertainty (i.e., the perception that tail risk is elevated) boosted gold. Everybody’s a winner – literally.
(Goldman)
The “problem” with this is that an encore in 2020 is virtually impossible. Even if you’re somehow bullish on everything, it would be wholly unrealistic to look at the chart above and say something like “Yeah, that seems repeatable”.
What’s amusing about the current macro backdrop is that barring another serious trade escalation (and this week has reminded everyone that you can never rule that out), the global economy is likely to inflect for the better, even if that inflection isn’t what one might call “vigorous”.
Last weekend, we got better PMIs out of China (here and here), and that was followed up by decent data out of Europe. Of course, another disappointing ISM manufacturing print in the US, a terrible ADP number and a lackluster read on German factory orders threw a bit of cold water on the narrative, but ultimately, this year’s rate cuts are likely to start manifesting in better data soon. Any partial resolution to the Sino-US trade spat would give a pro-cyclical rotation some extra juice.
So it’s somewhat tragicomedic that no matter how robust any turnaround ends up being, cross-asset returns have virtually no chance of topping 2019, if only because a truly vigorous turn for the better in the macro would be overtly bearish for bonds.
Barclays underscores some of these critical points in their latest global outlook. “By any yardstick, financial markets have put in a very creditable performance for 2019, one that will be hard to repeat in 2020”, the bank writes, before noting that the problem isn’t that economic fundamentals are likely to get worse.
“On the contrary, the major theme in recent months is the extent to which downside risks have faded”, they write, adding that “the economic outlook has brightened, or at least stopped worsening, global labor markets and consumption have showed impressive resilience to the drag from manufacturing [and] even the weaker parts of the global economy, such as the industrial sectors in Europe and China, are showing signs of stabilizing, albeit at low levels”.
The bottom line, Barclays says, is that “fewer downside risks do not imply upside growth surprises”. The bank expects a modest recovery in manufacturing, but warns that the US expansion is a geriatric, while “the euro area still faces structural growth issues” and probably can’t count on meaningful fiscal stimulus.
What about China? Well, we’ve spilled gallons of digital ink discussing the extent to which Beijing is hamstrung in their capacity to rescue the global cycle. One issue is that throwing the proverbial “kitchen sink” at the problem risks undermining the de-leveraging push which, while put on pause, has not been abandoned amid the slowdown. Additionally, the memory of the 2015 equity collapse is still fresh and Chinese policymakers aren’t keen to risk a repeat. Indeed, earlier this year, some market participants were actually hoping that Mainland shares would cool off, on the assumption that if the rally continued, Beijing might be inclined to being stingy with the stimulus for fear of inflating another massive speculative bubble in A-shares.
But beyond all of that, there’s the simple problem of depressed domestic demand (i.e., imports in contraction, retail sales slumping, auto sales in a historic dive, PPI deflation etc.), which is clearly making it more difficult for authorities to add effective stimulus (see October’s collapse in credit creation, for example).
For their part, Barclays has long warned that China will not deploy the kind of aggressive measures necessary to engineer a V-shaped recovery for the global economy, and the bank reiterates that in their outlook. “Most important, China does not seem likely to repeat the quasi-fiscal stimulus that it undertook in 2015-16, which set the stage for a global rebound in 2017”, the bank says, even as they note that the credit impulse has picked up.
(Barclays)
The somewhat frustrating conclusion is that it’s not clear what should be done or how one should position. Here’s Barclays’ quick take:
All of this makes for a rather unexciting macro outlook. Meanwhile, asset markets seem fully priced; for example, the rally in US equities over the past 12 months is due mainly to multiples expanding, not earnings growth. This is not a call for a de-rating, not when the returns in core bond markets look even less attractive. But with corporate earnings growth likely to be subdued (if positive) next year in both the US and Europe, so should equity returns. Yet we still prefer global equities over fixed income, given how little upside there is left in the bond markets. A slow grind higher in risk assets seems the path of least resistance.
We’d only quibble with one thing – namely, the suggestion that the macro narrative will be “unexciting” in 2020.
After all, the current occupant of the Oval Office has an uncanny knack for generating “excitement” out of thin air.
