2020 Annual Outlook

Growth Resilient
Despite Risks

While downside risks have risen, central bank stimulus and
a strong U.S. consumer should keep global growth positive. 

Global growth prospects remain clouded by a number of interconnected risks: a sustained decline in global manufacturing activity due to ongoing global trade tensions, a more pronounced slowdown in Europe and China, the possibility of policy missteps by developed market (DM) and emerging market (EM) central banks, and newer flashpoints in Hong Kong and Saudi Arabia, with ramifications that remain unknown.

While downside risks have risen this year, we believe global growth should prove to be resilient in 2020. We remain encouraged by the ongoing strength of the consumer globally and the enormous amount of monetary stimulus supplied by both DM and EM central banks—the combined weight of these two forces should truncate downside growth risks as we move closer to 2020. 

In the U.S., we’re encouraged by a recent rebound in consumer spending and a tentative improvement in manufacturing data. We see nothing in Fed policy nor in the ongoing growth rates of nominal GDP that would suggest any inflation spikes over the near- to mid-term. 

For the eurozone, while there are many downside risks and some countries might be at the brink of a technical recession, we feel that the market has become too pessimistic and we look for growth to recover modestly next year. 

This macro backdrop, along with reasonably solid credit fundamentals, is likely to continue to provide strong technical support for corporate bonds. The U.S. investment-grade market remains a compelling destination for global investors given its size, liquidity and attractive yield, relative to the UK, Europe and Japan. With inflation declining in many EM countries – which allows central banks to lower rates and support economic activity – we also believe EM real yields look attractive with additional room to compress.

 

Europe: Growth Sturdy, Risks Rising, All Eyes on Brexit 

Looking ahead to 2020, we expect eurozone growth to be around 1%, which reflects recent disappointments in soft data including service PMIs. While there are many downside risks and some countries might be at the brink of a technical recession, we feel that the market has become too pessimistic. In addition, the European Central Bank (ECB) has restarted its asset purchase program, linking its duration explicitly to inflation outcomes. 

We expect the German economy to accelerate in 2020 and a growth rebound in Italy on abating political noise. Other large eurozone countries could slow somewhat, but are likely to grow supported by accommodative monetary and fiscal policies across the continent. Risks around this baseline for 2020 are skewed to the downside; for example, if the service sector weakness in soft data becomes more pronounced and starts showing up increasingly in hard data. Other key risks next year include a disorderly Brexit, higher crude prices, and further trade escalation.

 

Eurozone Growth Remains the Principal Source of Global Growth Worries

Citi Economic Surprise Index, Jan 2019 through Sept 2019

Source: Bloomberg.  Reflects data through Sept. 25, 2019.  Past performance is no guarantee of future results. Indexes are unmanaged and not available for direct investment. Index returns do not include fees or sales changes. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
China: No Quick Fix

China’s economy is slowing for both structural and cyclical reasons at a time when the global economy is softening. Although USDCNY has traded above the 7.00 level, we do not consider the bilateral exchange rate to be of great significance as Chinese policymakers have fixed the CNY via a basket of trading partner currencies. On U.S.-China trade tensions, we do not expect to see a quick permanent turnaround in the near term, as neither country appears keen to concede meaningful ground. Looking ahead, escalating tensions and uncertainty will continue to weigh on sentiment, leading to further drags on capital expenditures and consumer confidence.

Asia in general looks well poised to provide fiscal easing to address near-term cyclical shocks from trade tensions and structural headwinds from the global economy. Countries likely to increase policy accommodation include Korea, Singapore, Hong Kong and Taiwan. Yet in EM economies, the case for structural reforms, for removing more barriers to foreign investment, increasing banking system liquidity to support domestic corporates and for infrastructure investment remains critical. Recent data out of Thailand and even the Philippines suggest economic growth continues to decelerate, driven by a slowdown in external demand and with domestic growth highly dependent on fiscal impulse and execution. Inflation (or the lack thereof) supports the base case for more monetary support even as central banks in Asia are increasingly aware that the challenges lie not just in policy rates but in still-weak transmission channels. Price pressures are subdued across Asia, with structural factors such as informal employment and still-strong demographic growth in EM Asia keeping wages low.

Against this backdrop, Asia local currency bonds in selected markets such as China, India and Indonesia could outperform broader EM this coming year. Asian currencies and local bond yields may benefit from the Fed dovish pivot amid subdued inflationary pressures. An emphasis on higher-carry currencies could help maintain a yield buffer/advantage, noting that the yield spread between the JPMorgan Government Bond Index (Emerging Markets Asia) vs. the Citi World Government Bond Index stands at over 250 bps (as at 30 September 2019).  In addition, Asian USD bonds, especially issues by Asian Investment-Grade corporates, crossover credits and Asia sovereigns/quasi-sovereign entities can be key considerations for investors looking for a diversifier and yield enhancer. 

 

Australia: Avoiding Stall Speed, for Now

Growth in Australia has slowed in line with other DMs and we now expect growth of 2.0%-2.5% in 2019. Although a reluctant cutter, the Reserve Bank of Australia (RBA) reduced rates three times since June 2019 after almost three years on the sidelines and has maintained an explicit easing bias.

Additionally, we now expect growth of 2.0%-2.5% in 2019 as there are indications that the housing market has bottomed. Although very strong, jobs growth has failed to keep pace with record labour force participation over the past year, resulting in a small rise in the unemployment rate, one of the key indicators the Reserve Bank of Australia (RBA) has explicitly targeted in its rate-setting deliberations. This would point to at least another cut in the near term.

 

Additional Outlooks
Brandywine Global
Growth in the Slow Lane


Clarion Partners
Cautious Optimism Amid Change


ClearBridge Investments
Consumers Hold the Key


EnTrust Global
Looking Beyond the U.S.


Martin Currie
Shifting the Global Balance


QS Investors
Uncertainty on the Horizon


RARE Infrastructure
How Infrastructure Is Evolving


Royce Investment Partners
Positive Signs for Small-Caps

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries. 

Nominal gross domestic product (GDP) is a GDP figure that has not been adjusted for inflation. 

Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody’s Investors Service and AAA, AA, A and BBB by Standard & Poor’s Ratings Service, or that have an equivalent rating by a nationally recognized statistical rating organization or are determined by the manager to be of equivalent quality. 

Real yields are calculated by adjusting stated yields to compensate for inflation expectations over the time period during which the yields are expected to be paid. 

The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) is an indicator of the overall economic condition for the non-manufacturing sector. Levels greater than 50 indicate expansion; below 50, contraction. 

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency. 

"Brexit" is a shorthand term referring to the UK vote to exit the European Union. 

The Reserve Bank of Australia (RBA) is the central bank of Australia. 

The JPMorgan Government Bond Index (Emerging Markets Asia) is an unmanaged index that tracks local currency bonds issued by Emerging Markets countries in Asia.

The Citi World Government Bond Index measures the performance of fixed-rate, local currency, investment-grade sovereign bonds in 20 countries. 

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. 

USDCNY is a shorthand term for the currency exchange rate between the U.S. dollar and Chinese yuan.

CNY is a shorthand term for the Chinese yuan.

Important Information

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.  

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. 

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:

In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:

In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China. 

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently. 

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas: 

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.