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Highlights

  • As we head into 2020, we expect global growth to edge higher, with limited near-term recession risks.
  • We survey the economic opportunities and geopolitical risks facing developed and emerging markets around the world. Top risks include rising populism, trade frictions, and monetary policy approaching limits.
  • We see EM equities as beneficiaries from the global recovery. EM central banks outside of China are likely to stay on their easing paths, supporting growth and equity markets. Among DM markets, we prefer Japanese equities which seem best poised to benefit from a truce in trade tensions and the global manufacturing recovery.

Japan: Fiscal boost

Easing trade tensions and a moderate recovery of consumer spending drove an equity market rally in the second half of 2019 despite an export slump, natural disasters and the fallout from a recent sales tax increase enacted in 2019.

In December 2019, Prime Minister Shinzo Abe presented his 13 trillion yen ($119 billion) stimulus package, which provides fiscal measures to aid disaster relief, protects against downside economic risks and prepares the country for what comes after the 2020 Tokyo Olympics. The fiscal package is expected to contribute 1.4% to gross domestic product growth through fiscal 2021.3 This comes in addition to the benefits from a global manufacturing recovery and easing U.S.-China trade tensions.

Japan’s labor shortage and record high level of government debt present key risks. We expect the Bank of Japan to maintain its expansionary policy as the headline inflation is still well below the 2% target.

U.K.: From Brexit to flextension

Brexit developments will likely continue to dominate the first quarter of 2020. The Conservatives Party’s majority victory in the December general election now provides Prime Minister Boris Johnson a favorable environment to push the Brexit Withdrawal Agreement through parliament. Reduced political uncertainty may also reduce some pressure on the Bank of England’s dovish stance while the Conservative Party is promising materially higher fiscal spending.

We expect the pound and U.K. domestic exposures to benefit from greater political stability and an improved growth outlook. As the perceived risk of a no-deal Brexit recedes, market sentiment has turned more positive. This is reflected in more positive flows into U.K. and European equity exchange traded funds. After an absence of buying for much of the year, European equity flows picked up starting in September.

Investor sentiment was lifted in Europe

Investor sentiment was lifted in Europe

Source: Markit, as of December 17, 2019. Based on U.S. listed ETFs. Flows are subject to change.

Canada: Steady in the North

Canada’s economic growth is likely to remain steady in 2020 after industrial production and manufacturing bottomed out in 2019. In fact, BlackRock’s Growth GPS, reflecting our forecasts of growth, for Canada rose throughout the second half of 2019, even as growth weakened elsewhere. While more than thirty global central banks cut rates in 2019, the Bank of Canada held interest rates unchanged, potentially leading to more monetary and fiscal policy flexibility in the next 12 months. In addition, a cheap Canadian dollar boosted exports at a time when trade uncertainty weakened business sentiment. On the policy front, the new USMCA trade agreement and progress made on the Trans Mountain pipeline plan could be further upside catalysts. However, volatility in oil prices and declining fixed investment, particularly in the energy sector, may weigh on Canadian equities.

Germany: Hitting limits

After the German economy narrowly avoided a technical recession in the third quarter of 2019, we expect it to remain weak in 2020. The domestically oriented segment is plodding along, with low unemployment and high utilization rates, but businesses with international exposures suffer from lower global demand growth and uncertainties around Brexit and trade tensions. This has been particularly marked in the automotive sector, which is hurt by global protectionist trade policies and the slowdown in China. With growth and inflation subdued, the European Central Bank’s monetary policy is likely to remain strongly accommodative over the coming years. As monetary policy is running out of ammunition and short-term rates can’t fall much further, a more aggressive fiscal policy is needed to provide a significant growth impulse. However, political uncertainty in Germany and the lack of progress on financial architecture could leave Germany vulnerable in the low rate environment for longer.

German GDP growth bottoms out

German GDP growth bottoms out

Source: Refinitiv Datastream, BlackRock, as of December 17, 2019. Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months' time.

China: Slowing but growing

The world’s second largest economy, China is seeing slowing growth, but it is stabilizing at around 6%.4 At the recent Central Economic Work Conference, attended by President Xi Jinping, policymakers emphasized the importance of social stability facing rising global risks, hinting that they could tolerate a lower growth target for improvement in employment structure and quality. While fiscal and monetary measures are likely to stay flexible to support consumption and employment, current high inflation level leaves little room for the People’s Bank of China to ease into 2020. Analysts currently expect Chinese earnings to grow 12% in 2020 versus 14.6% for the broader EM regions.5

While global markets celebrated U.S. and China’s agreement to sign a phase one trade deal in January and the removal of the December tariffs, proposed cuts on previously imposed tariffs are limited. In addition, the technological rivalry between U.S. and China is likely to persist in the long run. Potential global trade tension escalation, especially after the 2020 U.S. elections, could bring back market volatility.

China is aiming at eliminating poverty in 2020

China is aiming at eliminating poverty in 2020

Source: World Bank, Global Poverty Working Group. Data is not compiled from official government sources or computed by World Bank staff.

Brazil: Getting “Real”

We continue to see some of the best potential opportunities within emerging markets (EM) in Latin America. We expect Brazil’s real GDP growth to modestly accelerate from 0.9% in 2019 to 2% in 2020 as low rates boost consumer confidence.1 The passing of pension reform in 2019 was not only a political victory for President Jair Bolsonaro, but also creates momentum for the government to improve unsustainable fiscal positions. Besides the pension reform, the current administration also voiced an ambitious agenda which includes simplifying Brazil’s complex tax system, modernizing private investments, and lowering trade barriers.

Brazil’s accelerating growth and excess capacity are a powerful combination for earnings growth. Analysts currently expect 22.6% earnings growth in 20202 versus 10% in 2019. However, Brazil’s record-low interest rates and currency weakness could threaten the economic recovery. In addition, Trump’s recent tariff threat to the country presents another factor that could dent business sentiment.

India: Modi-fication

India is projected to lead emerging markets next year with the fastest real GDP growth at 7% and earnings growth of 29.1%.6 The slew of government measures announced by Modi’s administration in recent months, such as corporate tax rate cuts and the Reserve Bank of India reduction in rates, could translate to a gradual recovery in growth from recent weakness in activity data. Additional fiscal policies to boost public spending and to stimulate the property sector could be the next catalysts to watch.

However, further deterioration of the country’s balance of payments presents a major concern as a deepening current account deficit may put pressure on the balance. The country’s declining savings rate may also weigh on the deficit going forward. The BlackRock geopolitical risk dashboard indicates that geopolitical risk in South Asia remains elevated. Any further flare-ups between India and Pakistan could have a greater impact on markets.

Saudi Arabia: Aramco IPO to watch

Following the successful MSCI EM index inclusion and Saudi Aramco’s record-breaking IPO in 2019, investor interest in Saudi Arabia is on the rise. Related U.S. listed ETPs saw a 260% surge in inflows in 2019 with easier market access.7 The additional inclusion of Saudi Aramco shares means the energy sector is going to be a more important component of the MSCI Saudi Arabia index. However, the recent decline in oil prices and OPEC production cuts are weighing on the country’s economic growth. Data released by the Ministry of Finance suggest a higher budget deficit at 6.4% of GDP in 2020 compared to 5.2% in 2019. Meanwhile, the current account surplus is likely to remain for the next five years and beyond, removing any fears around “twin deficits”8 Saudi Arabia also has the burden to deal with regional geopolitical risks. Our BlackRock geopolitical risk indicator on Gulf tensions, which scans and analyzes broker reports, financial press and tweets for keywords related to the risk, spiked to more than five standard deviations above its historical average amid growing animosity between Iran and Saudi Arabia last year. Any similar escalation could potentially threaten investor sentiment.

Christopher Dhanraj
Director
Head of iShares Investment Strategy
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