5 THINGS INVESTORS SHOULD WATCH OUT FOR IN 2020

The year 2019 held several unexpected surprises for businesses globally, as it was a year deeply influenced by various unpredictable factors such as fear of global recession, the U.S. - China Trade War, the Brexit dilemma, the 3-time interest rate cut by FED and the negative data surprises across Europe.

Heading into 2020 however, there is optimism for the winds to change, gearing up the global economy to pick up pace and ease financial conditions, providing some much-needed relief to the trade tensions. 

After a detailed analysis of investment trends and financial information of global markets, I have summarized 5 major points to that investors should watch out for in 2020:  

1.    US DOLLAR

 The fiscal reforms and improved global risk sentiment during 2019 saw a resurgence of the strength of the US dollar as its index pushed to a two-year high and appeared to be too good to be true. Major banks, however, agree that after a patchy decade of gains, 2020 will see the US dollar decline as the global growth (Financial Times). 

 Thus, when investors’ sentiment is broadly positive, the US dollar tends to decline as investors feel safer investing into unusual assets such as emerging markets. Although this might be an opportunity for investors, they will have to be nimble in the currency market.

 2.    EMERGING MARKETS 

 Owing to the trade tensions and tariffs, 2019 was a difficult year for many emerging markets. Central Banks of EMs have been cutting policy rates since the second quarter of 2019 and this year EM central banks outside of China are likely to stay on their easing paths, supporting growth and equity markets. 

Thus, in 2020 investors may take advantage of EM equities, as they usually tend to perform better during periods of global economic re-acceleration and U.S. dollar weakness” 

 3.    US ELECTIONS

The much-awaited US Elections on 3 November 2020 is expected to be the largest and most impactful event of 2020. The House is currently controlled by the Democratic Party and it seems very probable that it will remain so. Prediction markets suggest that Elizabeth Warren and Joe Biden are the frontrunners (JP Morgan). 

Reviewing Warren’s policy proposal and its potential impact on the market: 

Elizabeth Warren’s current focus is on transforming the nation’s healthcare system which requires an expensive budget of $ 20.5 trillion to cover federal spending. Her policy plans to source the required funds by huge tax increase on businessmen and wealthy Americans, and taxing financial transactions on stock trades (NY Times) .

There is a need for investors to be realistic when it comes to 2020: a change of this magnitude would likely result in some volatility. 

4.    NEGATIVE INTEREST RATE ENVIRONMENT AND INFLATION

Currently there are $ 11 trillion in government and corporate bonds carrying negative yields (Bloomberg).

This kind of an environment can cause difficulties for Asset Managers in Europe and Japan, particularly for insurance and pension funds, as they might struggle to make profit from the increasingly scarce supply of positively yielding assets.  The negative interest rate policy is expected to be in place for a sustained period of time, not only to boost the economy but also to enable meeting the targeted 2% inflation rate. Furthermore, Federal Reserve’s Chairman, Jay Powell is already considering introducing a “Make-up Strategy” (Financial Times) that would let inflation run above its target.  

While this still creates an inflation risk, it could also be a great opportunity for investors to consider inflation-linked bonds as potential portfolio stabilizers for investors.

5.    ESG: ENVIRONMENTAL, SOCIAL, GOVERNANCE

Recognising the need to be socially responsible is an emerging trend in corporates today. Companies that have been proactive in this aspect have gained several benefits such as increased market trust and value for shareholders. As consumer trends and behaviors change towards responsible consumption patterns, corporates that have adapted their products and systems to be more environmentally friendly have stayed ahead of the curve. 

Today’s investor is highly educated and aware about the need of the hour to take care of the environment. Thus, the morality of the investors is clear: investors should take into consideration the social responsibility of a corporation as part of their analysis to identify material risks and growth opportunities in the long-term.

Conclusion: 

There are still many impending events and their impacts to consider, such as the Brexit, the ECB restarting its quantitative easing, and current tension between USA and Iran, to name a few. This is why, in the year 2020 investors should consider a robust investment analysis process that takes diversification into consideration. 

It also goes without saying that one should keep a positive mindset while investing. A lot of times, negative impacts to the markets can be caused by false alarms and panic about future events especially when the future is not easily predictable. Thus, by keeping an optimistic outlook and allowing the forces of the market to achieve their dynamic results, new opportunities may be uncovered. As they say in the world of investment - Greater the risk, greater the reward.

LISA TYSHCHENKO

?Msc in Finance Student, Grenoble Ecole de Management & Graduate Analyst, Deutsche Bank Wealth Management

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Bibliography

Ainger, John. 23 December 2019. Bloomberg - Bond World Is Backing Away From All That Negativity as 2019 Ends. https://www.bloomberg.com/graphics/negative-yield-bonds/.

Kaplan, Thomas. 22 November 2019. NY Times - Elizabeth Warren Proposes $20.5 Trillion Health Care Plan.https://www.nytimes.com/2019/11/01/us/politics/elizabeth-warren-medicare-for-all.html.

Manoukian, Jacob. 8 November 2019. JP Morgan - 2020 U.S. election primer.https://www.jpmorgan.com/securities/insights/2020-us-election-primer.

Szalay, Eva. 18 December 2019. Financial Times - Investment banks forecast dollar to head lower next year.https://www.ft.com/content/16f45cec-1816-11ea-8d73-6303645ac406.

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