1. Will the world economy slip into a recession?
This is the big question. No doubt the global economy is slowing. Regional growth statistics from the EU, parts of Asia and most Latin America economies are coming in below expectations. Reports from many sectors are, too, unexpectedly soft, e.g., car industry. That’s why many central banks slashed the policy rates this year to combat this slowdown.
But some parts of the world are continuing to hold up well. The US economy, for example, remains curiously strong. The latest employment numbers from the US tells us that the country is still growing. The market consensus is that US and China can still power the world into growth next year. A slowdown, yes. A recession, no.
But the Black Swan is definitely there in the picture. Nothing in economics is fixed in stone. Some countries may slip into ‘technical recession’ while corporate defaults may flare up.
2. Will the Fed raises interest rates in 2020?
I doubt it. At least not in the first half. In 2018, the Powell-led Fed tried the aggressive monetary recipe. But the market didn’t like it. Stock market collapsed soon after.
Therefore, the Fed is likely to ditch this path and try the ‘Yellen Way’ – soft hikes, no ‘surprises’ and always preparing to halt rate hikes and drop rates. The market is liking the new way. No wonder the US stock market is churning out record highs.
3. How many more trillion-dollar companies will we see in 2020?
When the market lurched dramatically lower in the December of 2018, investors thought that’s that last we would see those trillion-dollar companies. Yes, companies with a market cap containing twelve zeros: $1,000,000,000,000
Not quite. By the end of 2019, three companies are holding the $1T prize medal: Apple (APPL), Microsoft (MSFT) and Aramco. The latter just joined the trillion dollar club on December 12 with a market cap of $2T. Amazon was once a member of the $1T club, but the internet retailer has dropped by the wayside in 2019. Who will join this exclusive club in 2020?
The closest candidate may be Google (GOOG), which sports a market cap of $930 billion as I write. Its share price is clearly amidst a very powerful bull trend. Another 5-10% upside is possible – enough to kick the firm inside the elite club. No banks or financials is close to that $1T mark at this point.
4. Are there any market ‘bubbles’ on the horizon?
Investment bubbles are once-in-a-decade opportunities to make a ‘killing’. In 2017, investors went crazy about Bitcoin. No longer. Perhaps with so much uncertainties in the world, investors are sticking to trusted names like Google and Apple. Note that most of the $1T members are tech stocks. With price momentum so skewed in favour of the bulls, buyers see no reason to abandon these profitable tech positions.
Thus there is a possibility of the tech sector bubbling into a ‘melt up’. If you look QQQ’s (Nasdaq 100) long-term chart closely, you will see its phenomenal growth over the past ten years (see below). This is late-cycle stuffs. If tech stocks reproduced another blockbuster rally in 2020, this should really set alarm bells ringing! Trend acceleration can not last forever. And what usually leads the market to the upside also leads it downside.
We may see pockets of speculative bubbles in other niche markets such as Palladium – which is soaring on supply fears. Prices breached the $1800 level just recently and promptly rallied to $1,900. Another 5-10% advance should be ‘easy’ as its bull trend is rising parabolically. For gold, oil, copper et cetera, they remain stable and so do not qualify as bubbles.
Not to forget is that we may see strong rallies in new fads/sectors – like BeyondMeat (BYND) or pot stocks in 2018/9.
There appears to be an absent of credit bubbles a al Lehman Brothers. However, junk bonds may be worth watching, such as US Corporate Junk Bond ETF (JNK).
5. What about government bonds: Has the asset class peaked?
Government bonds did extraordinarily well in 2019. So much so that $17 trillion worth of sovereign bonds traded with negative yields during the summer. That number could be a peak for some time.
Looking at some of the bond ETFs like 20+ year TLT, however, I am not so sure if a secular bond peak has been reached. Whilst technically oversold, bond yields could just bump along the floor for an extended time. This means bond prices may stay elevated for months and years.
Let me recall a bond tale. In Japan during the 1990s and 2000s, shorting the government bonds is known as the ‘Widowmaker trade’. Why? Because bond prices never came down. Prices stayed up because private investors, corporates and insurers all piled into JGBs in the name of ‘safety’ (not unlike the stampede into bonds this year). Later, even the government soaked up quantities of JGBs via quantitative easing. This avalanche of demand ensure prices stayed high, and annihilated those who shorted the JGBs.
Many countries are following Japan’s economic path these days: Anaemic growth, low interest/negative rates, and a greying population. Thus, I will be in no hurry to short (or buy) sovereign bonds at these price levels.
6. Contrarian investment ideas for 2020?
There are some interesting investment concepts that may intrigue investors and traders who like to buy ‘oversold’ stuffs or promising assets that are under the radar:
- China – which may rally higher on any good outcomes from the tariffs talks. Remember, 2020 is the US Election year. The sitting president will like to conclude some agreements before the election.
- Emerging Markets – As a whole emerging markets underperform US market. This may change. Look to EEM for a potential bullish breakout.
- Small-Cap stocks – US small caps could be in a position to catch up its bigger brothers. Promising ETFs include the iShares Core Small Cap Stocks (IJM) or iShares Russell 2000 (IWO). Even the International Small Cap (GWX) appears to be basing.
- Long volatility – for traders who are concerned that the current market rally is overbought and due for a correction. This is a ‘hedge’ trade.
- Buy UK?
Watch small caps.
7. Will Brexit actually happen?
Highly likely. The GE19 dramatically changed the arithmetic of the UK Parliament. By awarding the sitting prime minister a thumping majority, he now has sufficient political power to pass the painfully negotiated Withdrawal Agreement. Hence, expect no further delays in Brexit.
The market likes this. A majority in Parliament reduces uncertainty. This may lure investors back to UK assets. Sterling’s overnight rally already captures this paradigm shift (see below). The sharp rebound in banks, utilities, property developers et cetera in the morning after the election further cemented this view.
More importantly, as the threat of nationalisation recedes, a re-rating of UK assets is under way. This may cause capital to gradually return to the UK.