Jan 13, 2020 Equities

Happy New Year on the stock markets in 2020?

2019 was a great year for stock markets, but what will 2020 bring? There’s a good chance that the upwards trend will continue, although it might not be as strong as last year.

  • 2019 was an outstanding year for equities. In the USA, leading stock-market indices hit new highs.
  • Persistent low interest rates and moderate profit rises suggest that share prices could continue to move upwards. However, markets are unlikely to perform as well in 2020 as they did last year.
  • The fly in the ointment is high valuations in some markets and the risks associated with the trade dispute, which are hard to calcuate.
5 minutes to read

The record was finally broken on New Year’s Eve 2019. Ten years, nine months and 22 days: the longest uninterrupted stock market upswing in the US stock exchange’s history[1] was complete. For the headline S&P 500 index this long upswing brought gains of nearly 400 percent in the period to December last year, with the S&P 500 never losing more than 20 percent.

This record run is particularly gratifying because 2019 was also one of the best years on the stock market. The broad-based US S&P 500 index rose by 31.5 percent, surpassing previous highs. In other regions, share prices rose too, sometimes also in double digits. This was the case for the Dax, which rose by 25.5 percent in 2019.

A brilliant year for shareholders

Performance of stock indices over the past five years in 12-month periods. Figures in local currency, MSCI EM in dollars

12/18 – 12/19

12/17 – 12/18

12/16 – 12/17

12/15 – 12/16

12/14 – 12/15

Germany / Dax

25.5 %

–18.3 %

12.5 %

6.9 %

9.6 %

Eurozone / Euro Stoxx 50

29.4 %

–11.3 %

9.9 %

4.8 %

 7.3 %

Emerging Markets / MSCI EM

18.4 %

–14.6 %

37.3 %

11.2 %

–14.9 %

Japan / MSCI Japan

19.6 %

–12.9 %

24.0 %

2.4 %

9.6 %

USA / S&P 500

31.5 %

–4.4 %

21.8 %

12.0 %

1.4 %

Legend: Percentage performance of various investments over the past five years

Past performance  is not a reliable indication of future performance.

Source: DWS International GmbH, as of: 31 December 2019.

However, it certainly wasn‘t a foregone conclusion that 2019 would be a record breaker, as markets initially had to contend with considerable headwinds. The USA’s trade disputes with Europe and China threatened to escalate. Global economic growth weakened. And central banks initially moved to tighten their extremely loose monetary policy. To make matters worse, the wrangling over the UK's withdrawal from the EU repeatedly weighed on share prices.

Slowing economic growth, central banks hitting the brakes and Brexit created headwinds in 2019.

As recession fears faded, shares received a boost in 2019

But the critical assessment that many investors made at the beginning of 2019 proved to be too pessimistic. Signs of easing in the trade disputes came to fuel hopes that their paralysing effect on the global economy might abate. It was also helpful that leading central banks rowed back from their ealier tightening and injected more liquidity into the economy to boost growth. As a result, coupon rates on bonds in Europe and the USA fell to extremely low levels. By August, fears of a possible recession had already receded and stock markets took off to finish 2019 at or near their annual high.

Gold also proved to be a good source of yield in 2019. It was in demand all year - not just because interest rates were low and sometimes even negative, but also because it offered a safe haven in the contect of an  unsettled trade and geopolitical situation. On a dollar basis, gold rose by 19 per cent to reach its highest value since 2013 - while the US currency itself was less volatile than it has been for a long stime, floating in a narrow corridor between 1.09 and 1.15 euros.

2020 – market excesses unlikely

What is the outlook for 2020? In its baseline scenario, DWS is cautiously optimistic about the future. Central banks in the USA and the euro zone will probably maintain their loose monetary policy, political uncertainties should diminish and corporate profits should see moderate rises.

At the moment, no excesses are in sight that could cause the economy and markets to collapse. However, trade disputes and escalations in political tensions, such as the recent conflict between the USA and Iran, remain a significant risk factor. One Tweet from US President Donald Trump could be enough to scupper the relative calm and send markets into a downward spiral.“

The basis for this market assessment is DWS's forecast that the global economy will not weaken further but will instead grow by 3.1 percent in 2020 as it did last year -- although there will be subtstantail regional differences. For example, US GDP is expected to grow by just 1.6 percent – compared with 2.2 percent last year - mostly thanks to a solid service sector. DWS’s prediction for the S&P 500’s level at the end of 2020 is 3,300 points.

If there is an orderly Brexit, European exports could provide a positive surprise.

In the eurozone, by contrast, consumers should be the mainstay, and growth is only expected to slow slightly to 0.9 percent against 1.1 percent last year. Much will depend on how well Brexit is implemented. If it goes well, exports could provide a positive surprise. DWS expects the Euro Stoxx 50 to rise to 3,770 points by the end of the year. For the Dax, it predicts a slight increase to 14,000 points by the end of 2020.

Emerging markets to be the growth engine

Emerging markets (EM), which now account for 60 percent of global economic output, should provide the global economy with a stronger impetus this year. Despite a slight slowdown in China, EM economic growth should pick up to 4.4 percent - from 4.2 percent last year. Above-average earnings growth and moderate valuations could then translate into rising share prices. However, a flare-up of the trade conflict and the ongoing protests in Hong Kong could create risks. DWS expects the MSCI Emerging Markets index to reach 1,120 points this year.

There are likely to be few alternatives to equity investments in 2020. Bond market yields look set to remain at rock-bottom levels for some time to come. At most, investors may still expect adequate returns from corporate bonds. DWS also assumes that the dollar’s sideways movement will continue and forecasts an exchange rate of 1.15 dollars to the euro.

The bottom line is this: although stock markets are likely to slow down in 2020, the traffic lights are still green. EM and Europe are likely to offer the greatest potential. With a balanced investment approach that includes both value and growth stocks, investors should have good return opportunities.

Investors should aim for a balanced mix of value and growth stocks.

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1. Source: https://www.cnbc.com/2019/11/14/the-markets-10-year-run-became-the-best-bull-market-ever-this-month.html; in this period the S&P 500 never lost more than 20 percent.

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