Despite fears at the start of the year and continued trade tensions, 2019 delivered strong performance in financial markets but we see some clear headwinds in 2020 as we all adjust to the new norm of low interest rates for longer.
We have reproduced below the executive summary of our recently published 2020 Credit Outlook report. To access the full version, please click here.
- While the global economy evidently experienced a slowdown during 2019, we ending last year with a slight feeling of relief considering some of the doom and gloom scenarios that some were considering back in January. It is undeniable that the US/China trade tensions have grabbed everyone’s attention and affected broader business confidence but timely actions by global central banks have so far appropriately contained any potential negative reactions.
- In this context, financial markets have performed extremely well, with equities close to their historical highs and the material drop in risk-free rates driving very strong returns for the fixed income markets. However, we are seeing some signs that all might not be as rosy as it seems, which highlights the need for caution, especially as investors are on an undeniable search for yields.
- We expect 2020 to deliver a slight rebound in growth compared to 2019, noting that we believe that the potential outcomes are asymmetric, with the magnitude of any upside potential being materially smaller than what a downside case could deliver. However, we do not see a scenario which could deliver a steep decline as was experienced during the GFC.
- On balance, we view 2020 as a likely year of stabilisation, with interest rates globally experiencing some minor downward adjustments but not to the same extent as 2019. Further we believe that default rates could marginally rise given current accommodative lending conditions and the continued search for yield which provides easily accessible and cheap financing, even for companies of poor credit quality.
- For these reasons, we continue to believe that a conservative approach to fixed income investments should be favoured and it is critical to accept that historical yields are simply no longer achievable without substantially increasing risks. For those chasing yields, diversification is a ‘must’, as is portfolio granularity to ensure no single exposure can materially affect overall portfolio performance.
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