2020 global outlook — Poised for a rebound?

12.17.19

The global economy struggled in 2019. Trade wars were the primary focus of markets, but other factors also were at play. Waning benefits from U.S. fiscal stimulus, elevated inventory levels, Brexit chaos, a stronger U.S. dollar and the lagged effects of tighter monetary policy in places like the U.S. and China coalesced to weaken the pace of global growth. We believe some of those headwinds are reversing and could provide some lift to global growth in 2020. Overall, we expect global gross domestic product (GDP) growth to average 3.4% in 2020, a slight uptick from 2019’s estimated 3.0% growth rate.

Investor confidence remained consistent throughout the year with most equities posting doubledigit returns. This confidence has not only sustained the record-long bull market — now in its 11th year — but also created the best performing run in history.


IVY VIEW
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U.S. economy maintains moderate growth

The U.S. economy slowed in 2019 to an estimated 2.3%, down from 2.9% in 2018. Interest rate hikes and a shrinking balance sheet from the U.S. Federal Reserve (Fed) coupled with the diminished fiscal benefits from the 2017 tax cuts would have been enough to slow the expansion. However, President Donald Trump’s escalation of the trade war with China and tariff threats toward other major trading partners — including the European Union (EU), Canada, Mexico and Japan — further pressured the economy.

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The Fed will hold the line on rates in 2020

Uncertainty around trade and the weakening of the global economy pressured the Fed to reverse its policy during 2019. After projecting two rate hikes at the start of the year, the Fed cut interest rates three times in 2019 and bringing the federal funds rate target range to 1.50–1.75%. We believe this reversal could further boost the housing market. In addition, the tightness in short-term lending markets caused the Fed to allow its balance sheet to grow again, which should remove the stealth tightening that was taking place by leaving the balance sheet unchanged.

Overall, we expect the Fed to leave rates unchanged throughout 2020. Fed Chairman Jerome Powell has indicated the U.S. central bank will raise interest rates only when inflation moves higher in a “significant” and “persistent” manner. If the Fed does decide to make a change, we believe a rate cut is more likely than a rate hike as inflation is likely to remain relatively muted.


IVY VIEW
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Global trade continues to pressure China and eurozone

China’s economy weakened throughout much of 2019 as policymakers attempted to find the right balance between reducing the pace of debt accumulation and preventing much weaker economic growth.

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Reforms taking hold in emerging markets

Emerging markets felt the effects of weak global trade in 2019, which led to disappointing economic growth overall. Turkey and Argentina had major recessions because of what we believe were self-induced problems. We think most emerging market economies could improve as global demand strengthens, the U.S. dollar potentially weakens and lower interest rates feed through the system.

India’s economy struggled in 2019, due in part to declining credit. A funding crisis among several non-bank financial companies — a key source of funding for India’s economy — triggered a significant slowdown in the country’s GDP growth. The Reserve Bank of India slashed interest rates and the government announced a reduction in the corporate tax rate, among other measures. We believe economic growth will find a bottom in early 2020 as the Indian government continues to stimulate the economy.

Policymakers in Brazil took steps in 2019 to help the economy continue to recover. This included critical pension reform, which could help stabilize government debt, as well as more accommodative policy from the central bank, which cut interest rates to a record low 5%. Brazil’s government would like to push forward additional reforms in 2020, including tax reform and changes to fiscal spending rules.


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Wildcards to watch

Fears of a global recession were heightened at mid-2019 after the U.S. Treasury yield curve inverted, leaving long-term rates below short term. We do not think a recession is likely in 2020. Our biggest fear continues to be related to trade. If the trade agreement between U.S. and China breaks down at some point, our confidence in a continuation of economic growth will fall and recession risks would likely rise.

We also have concerns related to the 2020 U.S. presidential election. The Trump administration’s policies have been decidedly pro-business, including deregulation and tax cuts. If an anti-business nominee emerges from the U.S. Democrat Party and demonstrates a strong chance to become president, we believe companies could again begin to reduce spending, which could lead to another economic slowdown.

Finally, there are geopolitical hotspots around the world that have potential impacts on the global economy. If Iran continues to be a disruptive force on Middle East oil production and shipment, a spike in energy prices could be damaging, given already weak global demand. In addition, the global rise in the popularity of parties espousing nationalism could further escalate tensions between countries.


IVY VIEW
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Market and sector view

Despite the prevailing headwinds of lingering trade turmoil and slowing global growth, strong underlying fundamentals and a “Goldilocks” economy that is not too hot/not too cold have combined to support overall investor confidence. This confidence has not only sustained the record-long bull market – now in its 11th year – but also created the best performing run in history. The S&P 500 Index has returned nearly 475% since March 2009, surpassing the long boom of the 1990s.

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2020 global outlook — Poised for a rebound?

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Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fixed income security may fall as interest rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds.

The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through December 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-cap U.S. equity market. The index includes 500 of the top companies in leading industries of the U.S. economy. It is not possible to invest directly in an index.