Kempen Outlook 2020
Will a new recession hit the global economy in 2020? This is the big question that keep economists on the edge of their seats. The damage of the trade war between China and the US and the uncertainty around Brexit are reflected in slackening trade flows, industrial production, and corporate investments.
The financial markets are showing a wide divergence. The extremely low interest rates on government bonds and the fact that long-term interest rates in the US are lower than short-term rates, suggests that bond investors assume a worst-case scenario. Equity investors take a more optimistic view: the American S&P 500 Index hovers around record highs, and the AEX has shown a nice rally. Low risk premiums on corporate bonds do not carry a sense of impending doom either.
The question for investors is whether expectations will be met. Will central banks take substantial measures to spur economic growth, and will such measures be effective? Is it at all possible for businesses to grow their profits in an environment of low growth and low inflation?
For 2020, we predict a challenging investment climate. For the time being, we take a defensive position, preferring capital preservation over squeezing the last drops of profit from the bull market. We would take a more of an optimistic view if there were signs of monetary policy is successful, especially in combination with tax incentives. Another encouragement would be a deal between the US and China, or an orderly Brexit.
Alternative scenarios are always more extreme and less likely, but not impossible. The influence of politics on the economy and on the financial markets has returned. We are bombarded with new tariffs. A trade war? A currency war? Companies are increasingly uncertain and cautious.
Low growth rates and high inequality makes for a volatile mix. The government must intervene, the middle class must benefit and the authorities must stimulate the economy… And they can! Certainly in Europe. However, there is a fine line between government investments and government expenditures. Free money is an illusion.
In short: Alternative scenarios have not become more likely. Yet, parts of these scenarios are finding their way into our main scenario. Key is to judge whether financial markets already anticipate this.
The current cycle has lasted exceptionally long, and yet there are no signs yet of an overheating of the economy. Inflation rates are still low, particularly as a result of structural forces such as technology, globalisation and excess savings. Excesses in the financial markets can predominantly be attributed to an artificially low cost of capital. At the same time, we see a slowdown in economic growth and a dramatic rise in uncertainty.
The scope for policymakers to use measures to stimulate growth is limited, so economic growth will slow and interest rates will remain low for several years to come. Low interest rates are bad news for savers, but they do benefit investors, because when interest rates remain low, valuations are under less pressure. The valuations of equities are not extreme, given the low interest rates.
Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This Outlook is for information purposes only and provides insufficient information for an investment decision. This information does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of 23 September 2019. These may be subject to change at any given time, without prior notice.