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Outlook 2020

03/01/2020

2019 is drawing to a close and it now looks as though we have avoided the widely forecasted recession. The global economy is stabilising and a bounceback in the euro zone and China cannot be ruled out. Monetary policies remain highly accommodative and fiscal stimulus is on the agenda across the world. Japan, for instance, recently announced a support package of over €100bn.

In the USA, the ISM services indicator is holding at a healthy 53.90, testifying to the future robustness of the service-heavy US economy. The ISM manufacturing survey, meanwhile, has touched bottom and now stands at 48.10. Monthly net new jobs figures also show no signs of weakening with 266,000 posts created in November. The Conference Board Consumer Index, a gauge of US household sentiment, is near an all-time high and household consumption is just as solid (annualised growth of 2.9% in Q3 2019). On 6 December, the Atlanta Federal Reserve used its GDPNow model to estimate US Q4 growth at around 2%. Finally, we note healthy corporate results in Q3 with around 77% of S&P500 companies beating their forecasts. Overall, there seems little prospect of recession in 2020.

In the euro zone, services are again proving resilient with the PMI for the sector still flagging expansion at 51.90. Manufacturing continues to struggle but the Markit Manufacturing index has been edging up for two months, from 45.7 in September to 45.9 in October and 46.9 in November. Corporate results have been healthy with 72% of euro zone companies publishing better-than-expected numbers. Activity has likely passed its low and a modest rebound is on the cards, particularly as the case for fiscal stimulus is gaining ground and has good prospects of bearing fruit. A joint initiative by the monetary and political authorities would boost growth in the zone. Remember the Juncker plan, which injected €439bn of investment between 2015 and 2019 in a joint drive by public authorities and private investors, which increased euro zone GDP by 0.9% over the period, creating 1.7 million jobs in the process (European Commission estimates).

Finally, turning to China, the Caixin/Markit China Manufacturing PMI has been improving for months and recently stood at 51.80 with the service indicator at 53.50. The OECD's China Leading Indicator also suggests some revival in activity with the economy set to grow by around 6% in 2020 after the authorities took fiscal and monetary policy steps to at least sustain current growth rates.

All of which still leaves open the question of international trade. It has been falling steadily over recent months due to uncertainty generated by Donald Trump and his trade offensive against China. The OECD estimates that a deepening of the US/China trade war could knock around 0.6% off world trade by 2021-22, reducing Chinese GDP by around 1% and that of the US by around 0.7%. This is not negligible but neither would it be enough to trigger a global recession.

In this highly likely scenario of global monetary and fiscal support, we continue to favour stocks that have historically high risk premiums, US BBB credits whose spreads are still good value, emerging sovereign debt in local currencies, which are paying attractive yields and should get a boost from the Fed's continuing accommodation, and sterling and the yen, both of which look undervalued on parity models and purchasing power.

Article by Florent Delorme, macroanalyst at M&G Investments.

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