Written by Mark Thomas
21 January, 2020
- Growth to accelerate in 2020 due to reductions in interest rates worldwide and a resumption of global trade after the US/China standoff is resolved in Q1.
- The effects of easy monetary policy should trickle down to the global economy soon.
- Typically, there is a six to nine month lag between a recovery in growth and lower interest rates.
This environment will be good for property and shares, in particular shares from emerging markets that have lagged the developed markets. Australian shares will also do well given the large weighting to resources and materials that benefit from an uptick in the growth cycle.
The Australian property market has been in recovery since the election in May 2019. It should continue to strengthen as a result of the First Home Buyers Lending Scheme and increased confidence in the market as lending conditions continue to ease. The Reserve Bank of Australia (RBA) is expected to ease interest rates again in February adding to this more positive picture. Rising global growth is positive news for a stronger Australian dollar which will also provide the RBA with scope to drop interest rates again in 2020.
Data from Europe and Chinese manufacturing indicators suggests a recovery is already underway leading the global manufacturing index upwards as show in the above chart. The automobile sector was hit hardest by the downturn in global economic activity and is now leading the way back up.
The trade war uncertainty remains the biggest risk for global growth prospects. For President Trump, the key priority is to get re-elected in 2020. A resurgence in the trade war would hurt Trump’s credibility. According to the Bank Credit Analyst “The point of the tariffs was not simply to raise revenue; it was to get China to the negotiating table. As a self-described master negotiator, President Trump now has to produce a ‘great’ deal for the American people.”
Trump is also a master politician and is playing the negotiating game to his political advantage. Had he finalized the China trade deal a year ago he would currently be on the hook for showing that it had worked by reducing the US trade deficit. Bedding down a deal in Q1 2020 he can make claims that a trade deal will only show signs of material economic benefit after he is elected.
The Chinese are also keen to complete a deal, preferring to deal with Trump who is focused on commercial issues. Elizabeth Warren or Bernie Sanders on the other hand, may insist on tough provisions related to the environment and/or human rights.
There is now a great deal of overlap between what Trump and the Chinese want. With China’s advances in technology many Chinese companies have begun to complain about intellectual property theft. Thus, strengthening intellectual property protection has become a priority for China. Similarly, the Chinese have aspirations for their currency to become a global reserve currency. This can only become reality if they continue to open their financial markets to the world.
In Australia we have seen the effects of Chinese capital flowing into our property market for many years. Expect this trend to continue in 2020, particularly as many Hong Kong residents consider their Plan B amid the human rights fallout of the riots that began in April 2019.
Hong Kong’s retail sales fell by their steepest on record in October, as ongoing anti-government protests scared off tourists and hit spending. Specifically, retail sales in October fell 24.3 percent from a year earlier, against a revised 18.2 percent drop in September and a 23 percent fall in August, as violent clashes spread across shopping districts impacting malls and restaurants.
The protests, along with US/China trade war uncertainties, has sent the Hong Kong economy into a recession for the first time in a decade. There is no doubt that rioters have had some backing from the US agitating the trade war issue even though the extradition bill has been withdrawn. Again, this is another extremely visible reason for the Chinese to come to the table and resolve the trade issue.
China needs and wants their economy to resume a more robust growth path and has been funding economic growth with tax cuts and spending on infrastructure for 18 months. This has seen an increase in their government deficit from 3 percent to 6.5 percent.
So it appears that growth will shift from “sluggish” to “rising” in 2020. Low interest rates and the resumption of global trade will underpin this trend. Growth assets such as property and shares will benefit, particularly emerging markets and commodity-based economies like Australia. More than half of the world’s countries (102 out of 189) and two thirds of developing countries are dependent on commodities with the number of countries that depend on commodity exports reaching its highest level in 20 years in 2019, according the United nations. Government bond yields should modestly rise and the current negative interest rate in Europe and Japan should abate. This implies flat returns from bonds although higher yielding corporate bonds should continue to provide reasonable returns as company credit ratings benefit from economic recovery.
Please consult your advisor for specific recommendations. This general advice does not take into account the client’s objectives, financial situation or needs as we do not and cannot provide personal advice. Any views written about in this article are the views of the author who has no holdings in those companies or investments mentioned in this article.