We expect a recovery in 2020 but a much weaker one than consensus
Things will get worse before they get better. Assuming any Phase One US-China deal is limited (no tariff roll-back), the existing tariffs should continue to work their way into the data and create an air-pocket in US growth in H1-20` (we are 60bp below consensus on the US, 20bp on China and 30bp on global GDP growth).
Tariffs have been the focus but other currents are shifting
We show that the Auto cycle accounts for up to half of the global industrial production weakness, the Tech cycle contributed 30-40% of the nominal trade weakness, and the US Shale cycle has also become a major driver of global activity. We also explain why loose financial conditions are not translating to growth. Although Tech and Autos should pick up momentum in 2020, US elections are coming into focus, Brexit remains unresolved and employment growth is only 40bp from ‘stall speed’ in DM. A comprehensive trade deal would not, on its own, turn all these currents around.
Four investment themes and 19 investment ideas for 2020
1) The UBS Cycle Clock tells us that it’s past Beta time. The Market Cycle is close to an all-time high while the Business and Financial Cycles are middling. We dig deep to find Alpha. 2) Policy makers who are willing (ECB, BoJ) have been less able to lift nominal growth, while those who are able (China, Germany) are not willing to loosen strongly. Risk premia may uncoil. 3) The gravity of zero and the world beneath it should keep duration bid, especially in the developed markets. Get used to flat curves. 4) Both tails are fat, but the cost of hedging is skinny – pay more attention than usual to protection.
Here is a full list of our investment recommendations along these themes.
Equities: Weak H1, better H2. US to outperform Europe over a bumpy ride Extreme outcomes are unlikely, whoever the next US President. We expect volatility, but over the year, we prefer the S&P 500 over Europe. Our other preferred markets are Japan, China and the UK, while we are cautious on Australia and EM ex China. We’re unlikely to have the conditions for a broad renaissance in Value equities until potentially H2 2020. Accompanying this document we are releasing three Q-Trade reports, where we screen for: a) high free cash flow-yielding stocks for a Value ‘catch-up’, b) stocks for a growth ‘grind’, and c) expensive stocks at risk of a de-rating.
Rates & Credit: Bullish duration, cautious on credit
2019’s positive correlation between rates and spreads should flip in 2020. We see IG & HY widening to 145bp & 550bp in the US, and to 130bp & 500bp in Europe. We expect global yields to bottom in mid-20 and rise thereafter. Our yield forecasts are below forwards in all of our markets and most particularly within the USD bloc. Relative to market pricing, we are least bullish GBP and most bullish UST, particularly 30y.
FX: Modest USD weakness
Relative growth is starting to weigh on the USD, and an improving global outlook in H2 should leave it modestly weaker by end-2020. We will be tracking purchases of foreign securities by US investors to corroborate our view. There is decent alpha to be made in NOKSEK, BRLMXN, and IDRZAR upside. Left tail protection through USDJPY downside and right tail protection through USDCNH downside appear particularly attractive.
Just as 2017’s strength was exaggerated, 2019’s tariff hit could have been similarly made worse by a perfect storm of falling car demand, a weak Tech cycle, soft shale production and tight financial conditions in China and India. Some of these factors may organically improve and lift global growth towards trend.
That is a solid bvase case thoughn a diagree on the China allocation. It looks likely to struggle mightily as deleveraging and trade weakness persist.
A moderate recovery scenario has already been priced into markets so if this plays out then they may have to correct.