At a recent conference organised by the employers' association of Financial Advisors ASEAFI in Madrid, Leopoldo Torralba, economist at Arcano Partners, explained his vision of the economy for 2020. A year that a priori appears calmer than the previous one, with fewer geopolitical uncertainties and glimpses of recovery in the European and emerging economies, and with the risk of recession remaining at low levels.
Investment scenario in 2020
The expansionary 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 (profitability) in risk assets in the current environment of low interest rates.
The Fed decided to stop injecting liquidity into the system in 2013, and began withdrawing it in 2017, with a view to slimming a balance sheet that had grown by $4 trillion after the 2008 financial crisis. However, liquidity injections returned last year to support banks in complying with new cash ratios resulting from regulatory changes.
The current high amount of liquidity in the market could generate bubbles in assets such as sovereign bonds, US bonds and real estate. However, in 2020 the rotation of assets in portfolios towards alternative options, which have a low correlation with the traditional RF and equity markets, will continue.
Prospects and risks
According to Torralba, in 2020 "the environment is positive for the economy". There are several reasons for this. The year has started with a decrease in trade tensions between the US and China, and with the Brexit issue on track after Boris Johnson's victory in the UK elections.
On the other hand, there is an improvement in the automotive sector, which was weighed down last year by the decline in purchases in China, while consumption in the US remains strong, given the strength of the labour market with wage growth of 31 Q3Y03.
Continued low global interest rates and expansionary fiscal policy, which will be maintained because of lingering fears of uncertainty, will lead to increases in spending and public investment that support corporate earnings growth.
However, an excessive acceleration could entail risks for the cycle. Risks that Torralba identifies: "the fall of margins in companies, the acceleration of inflation higher than expected, the lack of liquidity in secondary markets given the recapitalisation needs of banks (the main market maker in these markets) and the fall in some credit markets, especially High Yield, precisely as a result of this illiquidity".
Expectations by geography
The Arcano economist concluded his presentation with a breakdown of the macroeconomic outlook for the main global geographies.
The US is still immersed in a long bullish 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 excessive valuation of equities (S&P 500) and a possible negative impact on US stock markets of negative news on consumer spending, given the high level of investment in equities by US consumers.
China's growth outlook stands at 6%, although its level of indebtedness remains high. In this country, some uncertainties persist for its economy, such as the vulnerability of the financial sector, overinvestment that has created 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 the emerging areas an improvement in the cycle is expected, especially in Latin America, which is taking advantage of the favourable impact of the improvement in international trade (US-China truce) and the expected increase in the consumption of raw materials worldwide. Something similar to what is expected in the Asia ex-China area, which benefits from the improvement in trade and the loss of China's share in global exports.
The outlook for Europe is also favourable, despite the low level of expected growth. The recovery of the automotive sector and global trade are supporting the cycle, especially in Germany, which is the engine of the European economy.
Spain will continue to grow
Lastly, the economist from Arcano focused on the outlook for Spain for the year that has just begun. According to Torralba, no recession is expected, with growth estimated at 1.5%, somewhat lower than in 2019 but higher than in the euro area.
One of the keys may be the current unemployment level of 14%, with potential for new job creation, which could bring unemployment to levels of 8% if growth continues.
At this point, the increase in the minimum wage announced by the government does not seem to be negative for companies, because it is an acceptable level given the current profit margin. And while awaiting new fiscal or labour measures, the environment in our country has some added advantages, such as the absence of bubbles (especially in the real estate sector), the increase in competitiveness, and the reorganisation of the banking sector.
Javier Ferrer
Director of the Financial Communication Department of Proa Comunicación