Investors should expect low returns in 2020 across asset classes – for the sharemarket, mid-single-digit returns are expected to outperform even lower returns from cash and fixed-income investments.
Such low returns stem from the muted recovery in the global economy that is likely to take place throughout next year: a recovery that remains fragile and tentative.
This frail recovery, underscored by greater global economic stability (and corresponding lower risk of recession) is undermined by the continuing US-China trade war and economic indicators that cast doubt on the longevity and strength of any recovery.
This is why ANZ’s chief investment office is hesitant to increase its exposure to growth assets for now. To increase investment in the sharemarket we’d need to see a greater recovery in world economic fundamentals and a settled trade deal between China and the US.
And so we’ll be watching what happens with an expected trade deal between the US and China this month, with news outlets reporting on December 12 that a new wave of US tariffs on about $US160 billion of consumer goods from China – due to take effect December 15 – was likely to be averted.
If these tariffs were implemented, markets would take a dimmer view on the likelihood of a US-China trade deal, which would in turn threaten the recovery
Investment outlook – in brief
The economic recovery should support the sharemarket, which is already looking more attractive than bonds in terms of likely returns, due to rate cuts in Europe and the US. Overall, we believe Japanese, European and emerging market shares offer the best value to take advantage of the nascent recovery.
Australian equities are less attractive than other markets as they’re more highly valued, and so look more stretched relative to what can be considered ‘fair value’ according to our analysis. We should also note that domestic listed companies’ earnings expectations are lower.
In our view, bond yields will be capped at or below 2 per cent for the first half of next year unless the world economy shifts to a strong recovery.
While the mild recovery we’re in would normally support the Australian dollar, we expect it will remain under pressure as the Reserve Bank is likely to continue rate cuts in the new year. If the recovery solidifies as we expect, the Australian dollar may offer good value. The Australian dollar is currently caught between these two opposing forces.