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The first year of the new decade is shaping up for a relatively benign economic outlook but returns in 2020 will depend on a variety of different factors.
On the economic front, the US and China, are slowing down, but their monetary and fiscal policy stimulus in 2019 has been sufficient to engineer soft landings. Meanwhile, Europe and emerging markets are showing signs of recovery from the industrial/manufacturing recession of the past 18 months. All this could mean a relatively forgiving 2020, with modest deceleration in the US and China, and the potential for re-acceleration in Europe and emerging markets.
But investors will have to grapple with a variety of trends. Inflation, so far muted following the global financial crisis, could reassert itself if there is fiscal largesse in an easy monetary environment. The danger here is not a high probability of this happening per se, but the lack of awareness of the risk, particularly in the bond markets.
We should also not be complacent about continued US dollar strength. We could be reaching a tipping point when investors collectively recognise just how fundamentally overvalued the world’s reserve currency is. If that happens a different group of assets will gain market leadership. But investors are cautious, and in a world that feels unstable, the dollar gets top marks as a safe haven.
Another crucial but often underplayed component to asset returns is market structure. The enduring rise of passive instruments and low volatility strategies mean that new sets of investors are entering the market and old ones are changing their behaviours. Fundamental investors must be aware that a segment of the market is excluding valuation as a consideration in their investing decisions.
On balance, we take a moderately risk-on approach, but a wide range of economic, domestic and geopolitical risks persist. Resumption of nuclear testing by North Korea and US conflict with Iran are on the radar. There’s also the US presidential election to contend with and various flavours of increasingly extreme politics vying to outdo each other.
Overall, 2020 looks to be a story of growth stabilisation rather than big acceleration and it displays the signs of the final stages of a bull market. However, late cycle dynamics appear poised to extend for at least one more year.
The Investment Outlook is our flagship quarterly outlook publication that outlines our views on all the major asset classes including equities, fixed income, multi asset and real estate, and details the 'house view'. The views are built on the fundamental research that we undertake on markets, companies, governments, issuers, third-party managers, properties and tenants.
Fidelity’s Global Asset Allocation process combines the granular, on-the-ground views of our research analysts together with a macroeconomic and quantitative framework driven by our strategists. Each quarter, we bring together our regional and thematic experts from across the world to participate in the Quarterly Investment Forum (QIF), where we discuss macroeconomic and geopolitical conditions and how they will impact markets. Each asset class division incorporates this shared understanding into their respective investment and asset allocation decisions. Every month, we hold Global Asset Allocation meetings where divisional Chief Investment Officers (CIOs), global portfolio managers and strategists share and debate views on macro conditions, markets and cross-asset allocation to produce the house view.