Normally, come November, I start receiving unsolicited (usually) large tomes (usually) written by an economist, analyst or sundry pundits. They eagerly lay out their stall of predictions for the coming year, focusing on ‘global macro’ – for which read: the US economy – specifically economic growth (GDP), often inflation (CPI), occasionally retail sales, and rarely real estate. For good measure, some throw in a snippet on Europe, specialists cover ‘emerging markets’ – where many still include China, today’s second-biggest economy. All these data points have little immediate predictive use or in gauging the outlook for your current or future investments.
This year research offerings have been far fewer, savage cutbacks as banks shrink-to-fit and research is billed separately from share execution (Mifid II directive). Maybe the paucity is due to genuine uncertainty around another new decade (think 1990, 2000 and 2009), or possibly as many have been wrong footed several times over the last 10 years, they’ve become shy and retiring. Bankers are struggling to find credit-worthy names to lend to, with flat or negative yield curves an added aggravation. Stockbrokers face a dearth of initial public offerings (IPO) and massive share buybacks by listed companies – ergo: they have less to peddle. Bond markets, which rarely get much media coverage, were the star of the show, attracting record amounts of savers’ cash last year, forcing yields in many countries to new scary lows.
Last year the backlash against globalisation bit, and its effects should grow this year. What was the bedrock of ‘Economics 101’ – that international trade creates wealth – is questioned in terms of the distribution of that wealth, the effects on the environment and on local culture. It is estimated that today 1bn people are living in a country other than where they were born. The western ‘liberal elite’ and its establishment pillars are subject to scrutiny as never before, possibly even undermining US-style democracy (rather than that of Athens), which has been pushed globally since WWII.
That was then; what about tomorrow? My most important, and most difficult, piece of this year’s jigsaw puzzle is inflation. Here I am confident that retail prices will rise negligibly (by historical standards), or be negative. This is already happening with wholesale prices, some export prices, and new technologies. It is a catastrophic trend for anyone trying to pay down debt, which globally is at its highest level ever and across all borrowers. We also witnessed a surge in the price of food in some countries, up to 19 per cent annualised in China, hitting the wallets of billions of people, especially in the developing world. This means a lot less disposable income and ability to save. This could continue in 2020, thus keeping key interest rates and bond yields at rock bottom. The spread between yields on decent debt and desperate debt, as a proportion rather than as an absolute, should widen as too many nations, companies and individuals are deemed over indebted.
Central banks have run out of ammunition and out of ideas; we have yet to hear them admit to a) creating current conditions and b) that their tactics since 2008 haven’t worked. I say: don’t bank on them; look after yourself because they don’t have your back. Most of them have no commercial banking experience and do not ‘get’ that banking’s a confidence trick. They throw money at the problem, but despite this US M2 velocity of circulation is off a third from the 1990s peak, and is lower than it has been since 1960. The saying: you can lead a horse to water, but you cannot make it drink, springs to mind. In the last four months alone the Federal Reserve Bank of New York has, on an almost daily basis, added hundreds of billion in cash via the repo market – and it's not done yet.
Commercial banks today are fragile indeed, many using creative accounting yet trading at a fraction of book value; central bankers say they’ve all passed their ‘stress tests’. Be afraid, very afraid. Investment bankers are a dying breed – no one will be sorry for them – yet it could have a very detrimental effect on corporate fundraising and capital markets – on which the insurance industry depends. Here, the US has the biggest banks and the ones with the better prospects; the European Union is woefully under-represented.
Once again this year, like last, I’m fairly convinced that crude oil prices will remain subdued. The usual confluence of reasons will dominate, from OPEC strong-arming producers, Middle Eastern political instability, and subdued demand for transport; expect more slow work between $45 and $65. Talking of which, auto-makers, who thought 2019 was tough, should adopt the ‘brace’ position. Who in their right mind would buy a vehicle when government policy on emissions is like quicksand, ride-hailing Apps cheap as chips, and self-driving vehicles threatening to permanently lay off more blue-collared workers. In fact, the Saudi Aramco float may come to symbolise ‘peak oil’. Baltic Dry freight rates have been on the slide since September’s $1,090 brief peak and should continue towards $665 – although not 2016's record low $290. Natural gas will remain volatile at the historical lower end ($1.70 and $2.80 per Btu) of prices since 1990.
In terms of stock markets, I was truly surprised by last year’s performance of Chinese and US indices. Against a backdrop of the worst trade war between these two that I’ve witnessed, all their major indices rallied by around 25 per cent or more – again, testament to how little economics impacts markets. My emerging market picks did well, despite associated risks, some helped by crumbling currencies. Remember: ‘Don’t cry for me Argentina’ – as Generation Z takes Evita Peron as their role model. Today, I see the charts of developed market stock indices as expensive, overbought, and top heavy, Italy’s MIB up 30 per cent in the last calendar year. Please tread lightly.
In real estate there will be some interesting opportunities, mainly because it has clear rentier utility, either cutting rent paid or in the rents received, unlike many financial assets where returns are small and risk is high. Governments must get real about tackling the chronic unaffordable housing in large metropolitan areas, retailers must review the content and function of their spaces, and warehousing will remain on the rise. UK farmers will have to adapt to the fact they will no longer be in receipt of government benefits payments.
Foreign exchange notched new record turnover again last year, according to the BIS, yet the value of the US dollar index once again fluctuated in a narrow range – as it has done for six consecutive years, between 90 and 100. This might continue, but charts are still capped and it could fall by 5 per cent – easily. Sterling should continue its recovery against the US dollar, admittedly from some of its lowest ever levels. Against the euro, sterling found that £0.9300 is as important a cap as it was in 2016. Most interesting, as ‘hard Brexit’ is back on the agenda – much to EU chagrin and UK bluster. Which will gain momentum? Sterling, me thinks. Over the coming months, we expect it to drift reluctantly to £0.8000 (one standard deviation below its secular mean regression) and then to £0.7800 – well below 2008’s record high of £0.9800. Switzerland is likely to have similar issues, struggling to keep the Swiss franc above one per euro. Keep a close eye on this as it’s the leader in the experiment of keeping an open economy afloat through seriously unconventional monetary, fiscal, legal and diplomatic strategies. Latin American currencies are looking vulnerable, notably the Chilean peso, and after smugly being recession-free since September 1991, the Australian dollar is likely to lag its commodity counterparts.
Agricultural commodities are a mixed bunch, animal protein and animal feed prices likely to rumble along at relatively low levels. Talking of cheap, according to M&G’s Bond Vigilantes (I can recommend) the Commodities Research Bureau’s CRB index has been the second worst-performing asset class (after Athens’ stock index) over the last decade. Ironically bean and palm oil futures prices, along with coffee and rough rice, rallied a good 25 per cent in the fourth quarter of 2019, although again from depressed levels. These, along with grains generally, are not expected to rally much in 2020. Similarly, base metals and industrial commodities (such as cotton, wood pulp and rubber) should move sideways for most of next year. Precious metals are unlikely to follow through on this year’s gains, but don’t bank on palladium (which we picked out as a winner this time last year) giving back too much of 2019’s 55 per cent gain.
Finally, consumer and business confidence was dealt a serious body blow by the great financial crash that began 13 years ago; it still hasn’t recovered properly, and is in a very weak position to battle further serious headwinds. Politicians have only just started grasping how far the landscape under their feet has shifted. Centre-right/centre-left politics is imploding and ‘populist’ is just a word for people who don’t think like them.
