Themes for 2020
Need and fear (continues): The argument that equities are cheap relative to bonds is not new. A lack of credible alternatives has supported US equities and it will require a deeper recession to significantly reduce the earnings yield (EY).
Beyond the bleeding edge: This year has been tough for EM, particularly in Asia. The slowdown arrived early in Asia for semiconductors and autos. In much of Asia, GDP growth slowed this year and analysts revised their profit forecasts lower. As we exit 2020, we forecast a modest reacceleration of growth. Based on this forecast, markets are likely to finish the year healthy as they discount the recovery.
Trade to trust busting: Since May 2018, the Sino-US trade war has been the dominant policy risk. It is possible that in mid-2020 this rotates to trust busting if the democratic presidential nominee is in favour of breaking up big tech. This would be very damaging for some of the largest components of the S&P500.
Middle-road kingdom: Policy limitations, in our view, will result in a decline in Chinese capital market volatility. China’s two policy goals are: (1) full employment and (2) debt stabilisation. Non-financial debt approaching 300%/GDP leaves little room for stimulus. The result is gradual deceleration of growth without significant policy volatility. This leads to lower market volatility and more attractive market for investors.
ESG moves mainstream: The EU directive on ESG disclosure accelerates this. At our 26th CLSA Investors’ Forum, Pascal Gautheron, of Bain & Company, highlighted technologies approaching tipping points. Climate change deniers are likely to get poor as they ignore the fact that carbon-neutral technologies are competitive.
China trumps Trump: US attempts to restrict China’s access to US technology accelerates “made in China 2025”, as Chinese business seek suppliers closer to home. The innocently named Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act boosts local capital markets, notably Hong Kong as ADR companies move their listings.