December 5, 2019 | By: Stephen Way

Back to Fundamentals

2.5 min read

Policy support has overwhelmed fundamentals in recent years. Will it play a diminished role in 2020?    


Global equities performed strongly in 2019, supported by central bank easing and dramatically lower bond yields, and they remain attractive across several regions heading into the new year due to supportive fundamentals and valuations. This is true, in particular, for the likes of Japan, Europe and the emerging markets (EM), but central bank policy, global trade, geopolitics and the U.S. dollar will still be key market drivers.

The health of the global economy has been reliant on the American consumer and the underlying strength of U.S. labour markets. Thus, any positive developments in trade relations between China and the U.S. and more certainty on Brexit should underpin business confidence and may lead to a modest acceleration of investment spending and economic growth. U.S. elections in November 2020 may result in periodic volatility and will depend on the Democratic Party’s choice of candidate. While a U.S. trade deal with China is possible, substantive progress is unlikely, and U.S. trade visibility with the European Union remains low.

Despite U.S. yield curve inversion in 2019, we do not foresee an imminent recession, given a still solid labour market and other recessionary indicators that are not alarming at this juncture. We believe that we are in an environment of low interest rates, which will remain range-bound over the long term.

Uncertainty around Brexit continues to weigh on consumer and business confidence and investment in the U.K., though an agreement that averts a no-deal Brexit scenario should be supportive for growth and equity market performance in the region. Encouragingly, global manufacturing data could bottom towards the end of 2019 and inflect higher during 2020. We anticipate the German economy will benefit greatly, especially if the Chinese economy rebounds. While we expect the European Central Bank’s accommodative stance will remain supportive in 2020, additional fiscal measures are required. For the broader region, we look for more substantial progress on reform momentum and integration is necessary for a sustained improvement in economic growth prospects.

Economic growth in Japan may moderate in 2020 as the economy continues to adjust to the consumption tax hike in October 2019. Encouragingly, monetary policy remains supportive and fiscal stimulus should provide continued support for the economy over the medium term. We are also encouraged by the ongoing improvements of Japanese companies, fueled by increased shareholder activism and corporate governance reforms.

Selective EM equities are poised to outperform next year, though this is dependent on a weaker U.S. dollar, which is expected over the long term. Several factors are encouraging in EM, including relative economic momentum and earnings revisions, a stabilization in China’s purchasing manager index (PMI), the rise in foreign exchange reserves and investor positioning. This anticipates a rebound in China’s economy in 2020 as the previously announced fiscal stimulus continues to filter through the economy and additional policy support should be expected if required.

Stephen Way is a Portfolio Manager and head of global and emerging markets equities at AGF Investments Inc. 

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