06/12/2019 - Markets: DJE - Market outlook 2020


By Dr. Jens Ehrhardt, founder and CEO of DJE Kapital AG

Capital market outlook 2020: Politics rules the markets

For the coming year 2020, Dr. Jens Ehrhardt sees good prospects for the stock markets. The stock markets are clearly on green. Ehrhardt sees one reason for this in the US Federal Reserve's expansionary monetary policy, which aims to stimulate the weakening US economy. Another is China's sustained growth.

Contrary to many assessments, the two DJE market forecasts for 2018 and 2019 predicted that US interest rates would remain low - despite the US Federal Reserve's key interest rate hikes in the area of important 10-year government bond rates. Against this background, it was emphasized that equities in the USA, but also worldwide, were cheap compared to lower interest rates, regardless of the short-term economic and earnings trend. Accordingly, the US stock market was able to improve slightly last year - despite the brake policy of the US Federal Reserve. In the course of 2019, the FED then threw its rudder around 180 degrees on economic stimulus, interest rates and liquidity: it first switched fully to expansion in interest rates and then in liquidity - de facto the fourth quantitative easing. The monetary traffic lights are thus clearly on green for 2020.

Slowdown in consumer growth slows down US economy

The fundamental aspects of the US economy, on the other hand, are more difficult to assess. Contrary to all expectations, US corporate profits are falling (most recently -2.2%), and the growth rate of the economy is likely to have fallen to less than 1% recently. In the third quarter, US consumer spending alone was responsible for the US budget deficit, which rose to almost 5% of GDP, and an increase in inventories, which led to growth of 2.1% (previous year still more than 3%). The US economy is therefore almost exclusively based on consumption. This in turn depends on employment.

There have recently been slight declines in the total number of hours worked, in the length of the working week, in the number of part-time workers and in the speed of wage increases. This also suggests a slowdown in growth rates in consumption. So far, the central bank has been cautious with stimulus measures because it has pointed to the strongest tension in the labour market for around 50 years. In fact, however, the labor market is not an early indicator. This applies more to investments, which in their second year have already fallen in growth rates to almost zero. This important early indicator thus signals weakness in the economy for 2020.

Everything a question of charms

This is basically the "Goldilocks" scenario, which has been dragging on through long stretches of economic development in the USA since 2009. The economy is growing unusually weakly, which requires increased monetary stimulus measures by the central bank. The government has also pushed up new debt to its highest level in peacetime. With almost one trillion US dollars of new debt or around 5% of GDP, the western world is the most stimulated region. With a view to the 2020 election year, Trump is more likely to accelerate debt here than lower growth rates. Even the US Federal Reserve has never slowed the economy with interest rate hikes in election years. As a result, the monetary and fiscal policy barriers for stimulating the economy have been opened. This should have a positive effect on Wall Street in the course of the year.

Trade dispute continues to weigh on global economy

The political problems are more difficult to assess. The trade dispute with China is burdening the American economy by making imports from China more expensive. In addition, the fall in agricultural prices in the USA, caused by fewer purchases from China and a good harvest, is affecting the voters in the agricultural swing states who are important to Trump. Basically, Trump urgently needs an agreement. From this point of view, the signing of laws to support Hong Kong was counterproductive. Here China will defend itself with countermeasures, including sanctions against US companies, and continue to burden the world economy. China's relatively good economy, with surprisingly strong growth in leading indicators, makes the Chinese more confident - especially in their negotiations with Trump.

Re-election - when the economy is booming

If Trump does not succeed in getting the economy back on track, there is a threat of an election defeat. In the past, US presidents were only re-elected when the economy was booming. Even the democratic presidential candidates do not stand for a defusing of the trade war with China, because according to the Thucydides theory, economic advancement is to be prevented across all parties. But the Trump tax cuts will certainly be reversed to a large extent, which would burden companies and consumers. The profit margins of US companies have already been falling for more than three years due to rising unit labour costs. Against the backdrop of US equities valued highly in terms of profits, a burden on corporate earnings would be a burden on Wall Street.

Weakening of US share buybacks with negative consequences

In addition to monetary and fundamental factors, market technology also plays an important role in stock market activity in 2020. The main demand for US equities continues to come from US companies in the course of share buybacks. Since the financial crisis, more than 5 trillion US dollars have already been spent on such purchases. Most recently, the buybacks were around 20% below the previous year's level. A further weakening - for example due to a drop in corporate profits - would have clearly negative consequences. Foreign investors are overinvested on Wall Street. A possible decline in the dollar, which appears analytically highly valued, would probably lead to foreign share sales.

Further easing measures by the US Federal Reserve expected

The development of the US dollar probably depends less on the interest rate differential to Europe than on the future economic development in the USA. A surprising weakening will prompt the US Federal Reserve to make further easing efforts, which are not yet expected today. Also with regard to the highly indebted US companies, the US central bank, which today operates neutrally, could trigger massive liquidity boosts. This would push US interest rates down again unexpectedly, which would have a negative impact on the Dollar. A sudden weakening of the US economy would therefore depress the dollar and lead to a recovery of the euro. In Europe, the central bank has stimulated more consistently in recent years, which should result in a relative improvement in the economy in 2020.

Germany and Europe: politically driven economic outlook

Fiscal policy in Europe is expected to ease in 2020, which should also have a positive impact on the economy. If, for example, there were a similar level of new indebtedness in Germany as in the USA, the economy would boom. A possible left-wing government in Germany could push through a new debt with a corresponding signal effect for Southern Europe, which is already being stimulated by larger deficits, especially in France. From this perspective, a green-red-red government could have a positive impact on economic growth in Germany and Europe. However, corporate profits are likely to be burdened by redistributive measures. In 2020, Germany could be one of the stock exchanges that will be most negatively affected politically. In the end, however, the monetary factor also plays the most important role for the German stock exchange, similar to the US. After previous corrections, the DAX price (calculated without dividends) could break out of its sideways movement, which has not brought any progress since 2000, despite much higher profits and dividends today, which theoretically opens up a chart technical price potential of around 16,000 in the Performance DAX.

Asia: Japanese equities particularly promising - China with strengths

The Asian stock markets should be positively influenced by continued growth in China in 2020. This also applies to Japan, which has become increasingly dependent on China for exports. After Wall Street, Japan is the stock market with the largest share buybacks. Recently, these buybacks have almost doubled to over 50 billion US dollars. Since the central bank also buys shares via ETFs and international investors are as underinvested in Japan as they were before the Abe government, Japan could be favoured in market terms by 2020 and perform above average by international standards. The valuations of Japanese equities in terms of profit and substance are at a particularly promising level in an international comparison. Japanese companies have more liquid reserves in their pockets than America, which is more than four times as large economically. With its extensive investments in recent years in Asian growth sectors, there is also considerable growth potential for Japanese corporate earnings. The yen could also continue its upward trend. After the disappearance of the German mark, the yen is the best international quality currency alongside the franc, Japan the largest creditor country in the world (USA the largest debtor country).

Precious metals with long-term potential and significance

The prospects for precious metals, especially gold and palladium, remain positive in the longer term, even though the situation has recently been overbought with too much optimism. Since gold stocks have performed worse than the gold price for many years, a long-term upward reversal should also be possible for these stocks. However, the gold price recovery could drag on due to the sharp drop in gold purchases in China and the main gold buyer India.

Positive outlook for dividend stocks - bonds in the backhand

US hedge funds could buy more US equities again in a friendly stock market, where they recently had the lowest investment ratios in history. Fundamentally, it makes sense anyway to exchange other forms of investment for equities. Compared with bonds, where interest rates are likely to remain very low, companies generate an average return on their equity of 6-7% internationally. With still 12 trillion US dollars of bonds with negative interest rates, it would make sense to exchange them for solid equities. Bonds, on the other hand, make sense if there is a new, sharp economic slump internationally, which does not seem realistic.

Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.