In a recent conference organized by the ASEAFI financial advisory board in Madrid, Arcano Partners’ economist, Leopoldo Torralba, explained his vision of the economy for the year 2020. A year that a priori appears better than the previous one, with less geopolitical uncertainties and glimpses of recovery in the European and emerging economies, and with the risk of recession that remains at low levels.
Investment scenario in 2020
The expansive monetary policies of central banks will not change in 2020, which will mean the continuation of high levels of liquidity in the markets and low interest rates. A scenario that has led to the expansion of multiples (high asset valuations) given the high demand caused by the abundant liquidity available in the market, which continues to seek yield on risk assets in the current environment of low rates.
The FED decided to stop providing cash to the system in 2013, and began withdrawing it in 2017, with a view to thinning out a balance sheet that had grown by $4 trillion following the 2008 financial crisis. However, liquidity injections returned last year to support banks in meeting the new cash ratios resulting from regulatory changes.
The large amount of current liquidity in the market could generate speculative bubbles in assets such as sovereign bonds, US bonds and real estate. In any case, asset rotation in portfolios towards alternative options, which have low correlation with traditional equity and fixed income markets, will continue in 2020.
Favourable prospects and risks
According to Torralba, in 2020 “the economic environment is positive”. And there are several reasons for this. The year has begun with a decrease in trade tensions between the United States and China, and with the Brexit affair being dealt with after Boris Johnson’s victory in the UK elections.
On the other hand, there is an improvement in the automotive sector, which was hampered last year by the decline in purchases in China, while consumption in the USA remains strong, given the strength of the labour market with wage growth of 3%.
Continued low global interest rates and an expansionary fiscal policy, which will be maintained because there is still a certain fear of uncertainty, will lead to increases in public spending and investment that will favour the growth of corporate profits.
However, excessive acceleration could lead to risks to the cycle. Risks that Torralba identifies: “the fall of margins in the companies, the acceleration of inflation higher than expected, the lack of liquidity in the secondary markets given the needs of recapitalization of the banks (the main market maker in these markets) and, the fall in some credit markets, especially High Yield, precisely as a consequence of this illiquidity”.
Expectations by localization
The Arcano’s economist ended his presentation by outlining the macro perspectives for the main geographical areas of the world.
The US is still in the midst of a long upward cycle that looks set to continue. The risks that could affect it stem from an eventual victory of the Democrats in the November elections, the overvaluation of equities (S&P 500) and a possible negative impact on US stock markets of negative consumer news, given the high level of investment in equities by US consumers.
With respect to China, its growth expectation is 6%, although its level of debt remains high. There are still some uncertainties in the country’s economy, such as the vulnerability of the financial sector, overinvestment that has created financial bubbles (especially in the real estate sector, to which banks are highly exposed) and the absence of expansionary fiscal policies. The result is a low level of debt reduction.
In developing countries, the cycle is expected to improve, especially in Latin America, which is taking advantage of the favorable impact of the improvement in international trade (US-China truce) and the expected increase in raw material consumption worldwide. This is similar to what is expected in the Asia ex-China area, which is benefiting from the improvement in trade and the loss of China’s share in global exports.
The outlook for Europe is also favorable, despite the low level of growth expected. The recovery of the automotive sector and of global trade is favorable to the cycle, especially in Germany, which is the engine of the European economy.
Spain will continue growing
Finally, the Arcano’s economist influenced the perspectives for Spain in this year that has just begun. According to Torralba, no recession is expected, with a growth estimate of 1.5%, slightly lower than in 2019 but higher than in the Euro Zone.
One of the keys may be the current unemployment level of 14%, with potential therefore for new job creation, which could bring unemployment to levels of 8% if growth continues.
At this point, the rise in the minimum wage announced by the government does not appear to be negative for companies, because it is an acceptable level given the current profit margin. And while waiting for new fiscal or labor measures, the environment in our country has some added advantages, such as the absence of bubbles (especially in the real estate sector), increased competitiveness, and the consolidation of the banking sector.
Javier Ferrer
Financial Communication Manager at Proa Comunicación
