We
have barely started the year and already a number of issues have surfaced which
are likely to impact on the global macro picture. In the first instance, the
decision by Donald Trump to order a missile strike that killed Iranian general
Qassem Suleimani threatens further destabilisation in an already febrile Middle
East. Markets reacted negatively, as is often the way with such events, and
although nobody knows for sure what the longer term implications will be, this
sort of provocative action has the potential to generate a spiral that nobody
can control. At a time when the global economy has already lost momentum, a
spike in uncertainty does not bode well for markets, although as I noted a few
days ago, markets have developed a habit of defying bad news.
Nonetheless, equity markets would appear to be due a correction. After a massive rally in 2019 driven by Fed rate cuts, I cannot see this being repeated in 2020. To a large extent, the rally of 2019 felt a bit like the late cycle surge of 1999 when markets were driven by irrational exuberance. With the economy in the industrialised world likely to shift down a gear, and Chinese growth at its slowest since the late-1980s, the fundamentals underpinning the markets appear less favourable. There again, equities remain the asset class of choice so unless we experience some form of major random shock, it might be too pessimistic to expect a bearish correction (in the sense of a decline of 20% or more) but upside is far more limited than a year ago.
Central banks have started to make lots of noise about climate issues with Christine Lagarde suggesting it should be a “mission critical” priority for the ECB. Although climate change does not pose an immediate risk to the financial system, there are concerns that rising payouts as a result of climate-related issues could pose solvency problems for insurance companies, or that loans secured against property at risk of flooding could increase the burden of banks’ bad debts. There are those who criticise the actions of central banks’ intervention in this area, arguing that if they get involved in climate issues what is to stop them widening their remit into other areas? Whilst there is some truth in the argument, it is merely another example where central banks are providing a lead on policy issues where governments are unwilling or unable to step up to the plate.
Above all, politics will remain one of the dominant themes of the year, indeed decade. The big event of 2020 will be the US presidential election. A few months ago I would have said that the odds were in Donald Trump’s favour as he seeks re-election. I am less sure today. A lot will depend on how impeachment proceedings go; how the rest of the world reacts to the US intervention in the Middle East and who Trump’s Democratic opponent is. One thing is highly likely, however: It will be an even nastier campaign than in 2016.
Closer to home, 2020 will be the year that the UK finally leaves the EU – almost four years after the narrow vote in favour of doing so. The Conservatives’ huge parliamentary majority should prevent a repeat of the fractious discourse that characterised 2019 but many battles lie ahead. I still maintain that the economic risks associated with Brexit outweigh any possible economic benefits (which continue to elude me) but the real cost burden will only become evident in the longer term. I suspect that as the year wears on, Boris Johnson’s government will begin to find how difficult it is to deliver the benefits he has long promised.
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