Bank of America Merrill Lynch 2020 Market Outlook: Profits Rise, Economy Slows, Globalization Peaks, & Business-as-Usual Inve...
December 03 2019 - 11:30AM
Business Wire
Key drivers of this year’s late-cycle bull market gains are
expected to shift as the global markets enter the new year,
according to BofA Merrill Lynch Global Research, which was recently
named Institutional Investor’s top research firm in the world. In
its year-ahead outlook, the research team forecasts a bottoming of
economic growth in the spring as trade war tensions ease, and
relatively low recession risk.
Key highlights include:
- Stocks are expected to outperform bonds handily in 2020 as the
global economy bottoms out in the first quarter, while monetary
policy remains accommodative. The conventional idea of allocating
60 percent to equities and 40 percent to bonds is unlikely to
survive into the 2020s.
- An interim, skinny U.S.-China trade deal should temporarily
relieve trade concerns ahead of the U.S. presidential election and
pave the way for a midyear, mini-boost in global growth led by U.S.
rates and a weaker dollar.
- A rebound in U.S. corporate earnings should spur a long-awaited
uptick in capital spending and lift the S&P 500 to another
year-end high of 3300, or 6 percent above current levels. In a
reversal of trend, U.S. stock returns are expected to lag gains
forecast for Europe and emerging market stocks next year.
- The potential for 6 percent total returns on high-grade bonds
next year makes U.S. corporate credit particularly attractive in a
world facing $12 trillion of negative-yielding debt. Inflows from
foreign investors are expected to remain strong, supported by
favorable spreads, but today’s bond market “bubble” could become
the markets’ biggest vulnerability.
“The new year and decade begin near the tail end of the longest
bull market on record, and despite recent strong gains, investor
anxiety remains at a high level,” said Candace Browning, head of
BofA Merrill Lynch Global Research. “Many of the driving factors –
central bank policy, globalization, oil – have peaked, and new
economic paradigms are emerging in response to a different set of
challenges facing the world’s social, environment, political and
economic systems. Rather than focusing on the downside, we think
the opportunity for investors will be found in what happens
next.”
At the annual Bank of America Merrill Lynch Year Ahead Outlook
presentation today in New York City, the firm’s top strategists and
economists discussed the overarching themes that are transforming
economies and investing paradigms in the year ahead and throughout
the 2020s. Notable among these is the transition to stronger local
and regional economic ties, following three decades of economic
growth fueled by the benefits of globalization – an unchecked,
cross-border free flow of goods, people and capital that rewarded
cheap labor and low consumer prices. The shift from globalization
to localization and other global macro trends underpins much of
Bank of America Merrill Lynch’s outlook on the markets and economy
next year.
Key macro calls made for the markets and economy in the year
ahead are:
- Slowing global growth: Global GDP is forecast to slow
from 3.8 percent in 2018 to just over 3 percent in 2019 and 2020.
Europe should stabilize at around 1 percent, while a
below-consensus call on China assumes growth slowing from 6.1
percent to 5.6 percent. Inflation is likely to inch lower from 3.1
percent this year to 2.7 percent by 2021 while policy rates remain
flat and fiscal policy stays frozen.
- U.S. economic slowdown despite strong fundamentals: U.S.
GDP is expected to slow to trend, with growth averaging 1.7 percent
over the next two years. On the positive side, inflation should be
muted, with core PCE inflation at around 2 percent by the end of
2020. The Federal Reserve is not expected to take further rate
action for the foreseeable future, unless a material shift in
outlook triggers such a move. Given the Fed’s focus on avoiding a
recession, the risk of further cutting outweighs hikes.
- Modest gains in U.S. stocks, with greater upside outside
U.S.: S&P earnings per share are forecast to grow 8 percent
to $177 at year-end, and returns will likely be driven solely by
corporate earnings vs. price-to-earnings multiple expansions.
Emerging markets and Europe could offer more upside in 2020:
crowded positioning in the U.S. vs. the rest of the world, and
estimate revisions abroad outpacing those in the U.S. support a
rotation into global equities. Three significant tactical rotations
call for allocation shifts from growth to value, from large cap to
small cap, and from the U.S. to the rest of the world.
- Rates on pause as support from monetary policy wanes:
U.S. rates are expected to lead the way in 2020, with downside
risks somewhat diminished and higher repricing likely. Ten-year
rates are expected to move from 2 percent at the end of 2019 to 1.8
percent in 2020. The yield curve remains vulnerable to a paring
back of Fed easing expectations in the near term, while the swap
curve is expected to flatten. Fed actions freed other central banks
to ease, and with the exception of China, many are also expected to
put rate actions on hold next year.
- Credit cycle rolls on: Despite weaker global growth,
U.S. investment grade corporate earnings growth of 9 percent is
expected, up from 1 percent in 2019, with spreads tightening by 10
basis points and total returns of 4 to 6 percent. Gross issuance
will likely be down 4 percent to $1.137 trillion, with net issuance
declining 21 percent to $399 billion. In 2020, the 11-year
high-yield credit cycle is expected to keep on rolling, though
earnings will be the biggest risk. Default rates should stabilize
at 4 percent next year, as spreads gravitate to 450 basis points.
Key tactical rotations call for smaller over larger issuers, longer
over shorter spread duration, and more cyclical sectors.
- Emerging markets recovery contingent on trade: The
outcome of the U.S.-China trade war is crucial to the outlook for
emerging markets in 2020. Total emerging market returns of 7.1
percent in local debt are forecast, but only 2.6 percent for
external debt. Latin America is mounting a cyclical recovery,
likely led by Brazil and Andrean economies, while Argentina’s new
government faces extreme economic challenges. Idiosyncratic factors
will dominate in emerging EMEA, with Egyptian and Russian local
markets and Kenyan and Nigerian external debt favored.
- Weakening dollar: The U.S. dollar is expected to weaken
in 2020 with diminishing policy uncertainty. The euro and sterling
also should benefit from a resolution of Brexit uncertainty, with
EUR/USD and GBP/USD rising to 1.15 and 1.39 respectively. Stronger
global growth and a weaker dollar will help support emerging
markets. USD/JPY is expected to decline to 103, while AUD/JPY and
ASEAN FX should appreciate sharply on global reflation.
- Modest growth in commodities hedge inflation risks: A
positive roll yield should support modest commodity returns in
2020, with dispersion expected within energy, metals and
agricultural. Brent crude could hit $70 per barrel by midyear,
while diesel may near $100/bbl. Summer U.S. natural gas prices
could fall below $2/million British thermal units, as forward
balances continue to weaken after the winter. Cyclical raw
materials should benefit from a potential inventory restocking
cycle, easier Fed policy, and an interim China trade deal,
providing an attractive inflation hedge. While copper and nickel
are likely to rally in 2020, the outlook for gold and precious
metals is more cautious.
- Sector weights and rotations: Amid emerging signs of an
inflection in the manufacturing economy and interim trade deal, the
recommended sector weighting for industrials has moved to
overweight from marketweight. Given the likelihood that the trade
war re-escalates after the 2020 U.S. presidential election and
morphs from a trade war to a tech war, Information Technology moves
from overweight to marketweight. – Overweight: Financials, Consumer
Discretionary, Industrials, Utilities – Marketweight: Technology,
Communication Services, Health Care, Energy – Underweight: Real
Estate, Consumer Staples, Materials
Given macro trends impacting the markets, business-as-usual
investing is likely to come to an end. Localization, rather than
globalization, has major implications for global growth, and a rise
in moral capitalism is changing corporate behavior, shifting the
focus from shareholders to stakeholders. Investors should consider
several longer-term trends for 2020 and beyond: (1) from global to
local, (2) from trade war to tech war, (3) from bonds to stocks,
and (4) from short-term gains to long-term growth, where
environmental, social and governance (ESG) considerations can help
isolate the long-term growth stories.
To learn more about these major themes, please listen to a
podcast hosted by Candace Browning, “What the 2020s could bring for
the markets – and our financial lives.”
BofA Merrill Lynch Global Research The BofA Merrill Lynch Global
Research franchise covers more than 3,000 stocks and 1,250 credits
globally and ranks in the top tier in many external surveys. Most
recently, the group was named No. 1 Global Research Firm of 2019 by
Institutional Investor magazine; No. 1 in the 2019 Institutional
Investor Global Fixed-Income Research survey and Emerging EMEA
surveys; No. 2 in the 2019 Institutional Investor All-America
survey; and No. 4 in the 2019 Institutional Investor All-Asia and
All-Europe surveys. For more information about any awards cited,
visit https://go.bofa.com/awards.
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