Patrik Schowitz

After a year of conflicting signals, investors should welcome the growth and moderation of 2020

The divergence of rising stock markets from economic realities and political tensions should narrow in the coming year, given signs of a modest rebound in global manufacturing and a reduction of geopolitical risks

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People walk by the New York Stock Exchange at the beginning of the Christmas holiday week on December 23. Aggressive monetary policy easing by central banks around the world over the past year had a huge impact on asset returns, squeezing up valuations on stocks, credit and bonds alike. Photo: Getty Images / AFP

Patrik Schowitz

Published: 2:00pm, 27 Dec 2019Updated: 10:40pm, 27 Dec 2019

In many ways, 2019 has been a year of dislocation and disruption. The big wedge between stock market returns and economic growth illustrates one such contradiction: over the year, economic data and asset markets moved in opposing directions as earnings growth flatlined and world gross domestic product sank to below trend, yet all major asset classes posted handsome gains.

A simple balanced portfolio of global stocks and bonds (60 per cent stocks, 40 per cent bonds) delivered over 17 per cent return as of mid-December.

The key questions going into 2020 are: what led to this unusual divergence of growth and market returns, and will this environment persist into next year?

There were three underlying factors driving events in 2019: a global manufacturing slump, heightened geopolitical tension (first and foremost US-China trade tensions and Brexit), and easier monetary policy. Manufacturing weakness and geopolitical uncertainty weighed on GDP and other economic indicators by depressing capital spending, inventories, and business confidence.

However, in the end, aggressive monetary policy easing by central banks around the world had the bigger impact on asset returns, squeezing up valuations on stocks, credit and bonds alike.

Now we are in the last few days of the year, there is finally some better news on both the economy and geopolitical risk. On the former, there has been increasing evidence of a modest rebound in global manufacturing data. On the latter, uncertainty should reduce following the conclusion of the “phase one” US-China trade deal, as well as the lower likelihood of a no-deal Brexit shock following the British election.