Global Outlook January



Richard Dunbar, Head of Research, Multi-Asset Solutions

For investors, 2019 turned out to be an interesting cocktail of politics, trade wars and gyrating economic expectations. But in the background central banks remained willing to “do what it takes” to keep the global economy on an even keel. In this environment, market returns were unusual in the sense that virtually all investments rose in value. In some cases, significantly so. So how do we navigate the uncertain economic and market waters from here?

In this issue of Global Outlook, our authors seek to answer this question. Importantly, the articles consider not only our economic and market expectations for the year ahead, but also what role institutions like our own should play in the increasingly complex investment and savings world around us.

In our opening article, Keith Skeoch, CEO of Standard Life Aberdeen, reflects on the investment year just passed and on his expectations for the year ahead. As those entrusted with investing on behalf of our clients, Keith also considers what sort of owner of those investments we should strive to be. How do we ‘walk alongside’ clients who are being asked to take increasing responsibility for their own investment decisions? What does good stewardship of the investments we own look like? And how can we play our part in rebuilding trust in the industry in which we play such an important role?

Next, Sree Kochugovindan looks into her economic crystal ball and, in particular, studies the consumer side of the economic equation. She notes the increasing reliance on the consumer as the central plank of economic forecasts, given the recent deterioration of the global industrial cycle. However, she paints a relatively positive picture for the year ahead, as employment and wage growth put more money in consumers’ pockets and give them greater confidence in their spending plans.

Aymeric Forest then considers what we should expect from a multi-asset strategy. The unusual shape of market returns and the high correlation of asset classes over the year (and indeed since the financial crisis) have led some to question the benefit of diversification. In this environment, Aymeric asks whether “the only free lunch in finance” noted by Harry Markowitz in the 1950s is still being served. Aymeric also updates the menu for the slightly different investment world that we now inhabit, and explores six trends that are reshaping multi-asset portfolio construction.

Political uncertainty was a notable feature of 2019. The US-China trade dispute and its effects on global growth unnerved investors, with periodic hopes of a breakthrough invariably dashed. In the UK, Brexit machinations stuttered painfully amid daily scenes of turmoil in parliament. Political instability also rocked Italy, raising the spectre of another election. By year-end, given the generally favourable outcomes of these events, investors could be forgiven for believing political risk had diminished. But Stephanie Kelly cautions that, although political uncertainty has lessened in the short term, the longer-term drivers of political risk have by no means disappeared.

In our final article, Ken Dickson reflects on a year of few foreign exchange trends and of continued low volatility. Ken outlines why he expects these features to persist in currency markets as we enter 2020. He also examines the outlook for the rather unusual negative-interest-rate policies, so prevalent of late. Finally he shines a spotlight on the emerging market (EM) currency complex. We are currently in an interest rate environment which offers EM central bank governors many more options than they’ve had in the past.

This is an important time for all asset managers, both in terms of the complexity of the investment landscape they survey and also the increasing scrutiny that they are correctly under as stewards of the hard-earned savings of their clients. As we enter 2020, this issue of Global Outlook seeks to explore both these areas.


Richard Dunbar

Chart editor
Craig Hoyda


Beyond 2020 - the age of
the responsible investor

Chapter 1


Keith Skeoch, CEO

For investors, last year was a heady mix of trade wars, Brexit upheaval, economic pessimism, historically low interest rates and positive, but volatile, markets. It’s therefore reasonable to ask – are we in for more of the same in 2020? The answer is: probably yes, but with important caveats. And what about the bigger picture? After all, it’s my job to reflect upon issues outside these day-to-day developments and gauge where the financial industry is headed as a whole. When I do, I see great change, great challenges and, most of all, great opportunities.

Détente not a deal

But let’s start with 2020. Many of the drivers of sentiment from 2019 will carry over into this year, notably politics. The US-China trade war dominated the headlines over the last 12 months and looks set to rumble on for the foreseeable future. True, there has been something of a breakthrough in recent weeks in the form of a ‘phase one’ agreement, to be signed on 15 January. As part of the mini-deal the US will suspend its previously announced $160 billion tariff increases and halve its 15% tariffs on $120 billion of goods. China, meanwhile, has pledged to beef-up its purchase of US agriculture goods and make fresh commitments around intellectual property transfers. This is certainly encouraging, but I’d still recommend caution. The major sticking points – Chinese state-owned subsidies, cyber security – remain unresolved. The original tariffs are still in place. The possibility that talks could suddenly break down, as they did in May last year, remains an ever-present danger (Chart 1).

We in the financial world have a prominent part to play in the large-scale realignment of the capital that is required to decarbonise the economy.

Chart 1: Tariffs a tweet away from rising higher

Source: Peterson Institute for International Economics (as of 19 December 2019)

Will the two sides eventually strike a comprehensive deal? Ultimately, it is in both parties’ interests to reach agreement, but the timing remains uncertain. One catalyst for a deal could be a rapid deterioration in economic growth. A stock market slump would certainly focus minds. President Trump may also be keen to strike a deal as he heads into the blistering heat of a presidential election. Irrespective of the reason, investors would view a treaty as positive and equity markets would no doubt reflect this.

In the UK, the Conservative Party won the general election by a landslide, with voters seemingly determined to “get Brexit done” above all else. The initial reaction was one of relief. Investors and businesses alike have craved certainty following three-and-a-half years of turmoil. Prime Minister Boris Johnson’s Withdrawal Agreement sailed through parliament and into law before the Christmas recess. So, is Brexit “done”? Not by a long shot. Mr Johnson will now start the hard work of trying to negotiate a comprehensive trade deal by his self-imposed end-2020 deadline. His plan to make an extension illegal will not only heap pressure on that process, but also put the threat of ‘no-deal’ back on the table. So much for certainty.

More importantly, the healing process needs to get under way. Mr Johnson should look to utilise his strong mandate to be thoughtful and decisive, rejecting the polarised extremes that have come to define the debate. He should also seek to deliver a ‘good’ Brexit that works for Remain and Leave voters alike, as well as the wider economy. The coming months and the March 11th Budget will tell us if he is willing to take that path. Either way, Brexit is likely to remain a feature of the UK landscape for the next 12 months.

A year of two halves

On the markets, while I don’t expect the kind of returns we saw last year, I am relatively positive in my outlook. Equities are on an uptrend following the aforementioned progress on trade. Third-quarter corporate results threw up no big surprises, albeit from much-reduced expectations (Chart 2). Meanwhile, the US economy appears to have shaken off the threat of recession, while data elsewhere is bottoming out. Almost every central bank is now easing monetary policy. Additionally, governments are joining in with increased public spending. It is rare to see both monetary and fiscal policies easing at this stage in the business cycle, when unemployment and inflation are at such low levels – we live in unusual times. However, such stimulus is nearly always a good thing for risk assets.

Chart 2: Earnings continue to support


Source: IBES, Refinitiv Datastream (as of 31 December 2019)

Past performance is not a guide to future results.

Despite this, I do think that, having avoided one in 2019, we will see some sort of correction this year. After all, the near-11-year-old bull market is now the longest in history. What could light the fuse? The economic data may have turned less bad of late, but there are dangers in the long grass. As we have seen, we’re only ever one tweet away from another trade crisis – the next flashpoint could be decisive. On the political front, the emergence of Elizabeth Warren or Bernie Sanders as the Democratic presidential nominee could spook Wall Street, given the candidates’ views on everything from ‘Big Pharma’ to corporate tax. The Middles East, as recent events have shown us, remains a tinderbox. Of course, timing the correction will not be easy – but I’d expect bouts of volatility until the moment arrives.

Time for a rethink

Obviously, the political backdrop and direction of markets will continue to consume much of our thinking. However, as we enter a new decade, we must also look to the long-term future of our industry. There’s much to consider.

It’s clear that the investment world has fundamentally changed since the financial crisis. Numerous factors have emerged, from the democratisation of financial risk to the compressed returns available for savers. A lack of trust in financial services and experts has grown in tandem with a very real sense of financial inequality. The notion of financial return above all else has come into question. The belief in the ‘trickle down’ effect of tax cuts is on shaky ground. All of these pose their own conundrums and their own opportunities.

Addressing these factors requires a change of mind-set on our part. I believe we have a massive opportunity to help rebuild trust and faith in capitalism – the economic mechanism that has delivered rising prosperity for most of the last 400 years. To do so we need to accelerate the shift to a more responsible and inclusive capitalism where the benefits are clear to all – not just the few.

Here, the UK can lead the way. The general election result means we all have a not-to-be-missed opportunity to refresh and reinvigorate the social compact between businesses, government and people that is central to a well-functioning capitalist economy. We have the chance to forge a common agenda for the common good.

What should this agenda look like? With monetary policy largely out of gas, fiscal policy must carry the bulk of the burden, providing both economic stimulus and ensuring an appropriate allocation of public and private-sector resources. With employment so high and inflation so low, the focus clearly needs to be investment that will boost capacity and raise productivity over the medium term. For sure, this implies spending on physical infrastructure but it is just as important we invest in our human infrastructure. Education and well-being are equally critical to productivity and the long-term sustainable health of the economy.

For the good of all

Asset management has an especially important role in helping to develop a new social compact. After all, we play a central part in turning the public’s savings and pensions into investments, and allocating capital throughout the economy on their behalf. Our industry also has a responsibility to monitor corporate behaviours and connect businesses with savers’ desire for a return.

What, then, needs to change? As asset managers, we have always, rightly in my view, placed a huge emphasis on competency and reliability. The bedrock of this has been our fiduciary duty of care to clients and the relentless delivery of performance. Historically, however, we’ve been in an industry that’s very product orientated, one that relishes its role as a technical expert. Being great at what we do may boost the bottom line – but it will do little to lift the low level of trust in the industry. In my view, the asset manager of the future must have a strong sense of its place in society. More importantly, society must once again value the service we provide.

This partly entails addressing financial inequality. We have to find ways to give investors of all stripes access to the returns that have historically only been available to the wealthy, such as from private markets. To create the necessary investment vehicles, especially at the right price, will take scale and ingenuity. It will also require an honest conversation about how we manage investments and the kind of timeframes required to generate the desired returns. In an industry that hangs on the next quarterly corporate update, that conversation will not be easy. Nonetheless, it is one we must have.

Investing in a changing climate

And then there is stewardship and ESG (environmental, social and governance). It’s probably fair to say that 2019 belonged to ESG. You couldn’t move without finding an investment house boasting about its ESG capabilities or the extent to which it had integrated ESG into its investment processes. And, to be fair, this is understandable. I believe – and have done for 25 years – that ESG factors are major drivers of long-term investment returns: not just when analysing individual companies or securities but across the whole investment universe.

But most of all, ESG is about getting it right for the next generation. I believe we need be responsible investors, which means we are good stewards of the capital we allocate. I have long-recognised that being good stewards also means doing more than simply focusing on financial returns. We have to look beyond shareholders to a broader list of stakeholders – to customers, regulators, suppliers and the world in which we operate.

When we do, we will find many challenges await. Take climate change. Last year, the sight of devastating hurricanes, floods, droughts, wildfires and temperature extremes underscored the urgent need to combat this most pressing issue. It’s becoming increasingly apparent that the physical devastation will also bring financial risk for many firms and industries, such as reinsurance, real estate, forestry and energy (Chart 3).

Chart 3: Climbing climate costs


Source: National Oceanic and Atmospheric Administration (as of 8 October 2019)

The need for society to shift from fossil fuels to low-carbon alternatives is clear. According to the International Energy Agency, the world needs to invest around $2 trillion dollars a year in low-carbon energy and transport. Only then can we achieve the internationally agreed target of keeping temperatures “well below 2 degrees” above pre-industrial levels, also known as the Paris Agreement.

On most counts, however, the global response has fallen shy of what’s needed. Many fear the world won’t even meet the modest targets set in Paris. The recent Conference of Parties 25 in Madrid was a major disappointment and exposed deep divides between nations.

That’s not to say it’s time to throw in the towel. In the UK, for example, commitments made by the previous government set it apart as a leader in the fight against climate change. If we genuinely act on these commitments, I believe we can unite people behind a common cause, including the alienated youth vote.

We in the financial world have a prominent part to play in the large-scale realignment of the capital that is required to decarbonise the economy. To that end, I expect to see continued growth in financing climate solutions like renewable energy, electric vehicles, storage, energy efficiency. This could be via listed equity, credit, infrastructure or other asset classes.

This, though, is a sector in its infancy. At present, it’s unlikely that the global clean energy sector could absorb the additional capital from an enlivened financial sector. Nonetheless, it is our job to work in tandem with industries to drive change and to develop viable projects and investment opportunities.

As a company, we’re doing our part to address climate change. Aside from our financial commitments, we have pledged to offset our entire carbon footprint and become carbon neutral in 2020. The carbon credits we buy will fund projects that reduce greenhouse gas emissions, such as restoring forests, modernising power plants or increasing the energy efficiency of buildings. Further, we have also committed to 100% renewable energy in our buildings, and vowed to cut our greenhouse gas emissions from energy use by 50% by 2030.

The next generation

Where does all this leave us? As I have highlighted, trust has crumbled and will take time to restore. Our industry should continue to meet that challenge. That’s because, fundamentally, ours is a honourable profession. By allocating savers’ capital, we are able to create wealth and jobs, spur economic growth and generate retirement incomes, much of which benefits the common good. But we must do more. We must strive to deliver sustainable growth that benefits the broadest cross-section of society. We must forge a new social compact, thereby boosting our relevance to a whole new generation of savers and investors.

So, while we may contend with the latest twists in the trade war or possible market correction, I believe that, for 2020 and beyond, we must continue to focus on doing the right thing, for our clients, our shareholders and the society in which we operate. The foundations for action are there; it’s our duty to ensure we build on them.


We in the financial world have a prominent part to play in the large-scale realignment of the capital that is required to decarbonise the economy.

All eyes on the

Chapter 2


Sree Kochugovindan, Senior Research Economist

Despite the sharp deterioration in the global industrial cycle over the past two years, consumer spending and the service sector have remained resilient across most economies. Robust disposable income growth should continue to support the global economy into 2020, although downside risks have not evaporated entirely.

The global economy is showing early signs of stabilisation as a host of central banks have eased policy in response to the deceleration in global growth. Financial conditions have loosened in response. This should put a floor under growth in interest rate-sensitive sectors, while also helping to stabilise global manufacturing activity. Geopolitical tensions that had dominated in 2019,have partially subsided, as US and China trade tensions eased, and no-deal Brexit risks have receded. However, new risks have emerged in the Middle East. While US-Iran relations had been deteriorating throughout the Trump presidency, recent events have heightened tensions to a more dangerous level. At the moment we do not alter our baseline macro view, however, tail risks relating to further conflict in the Middle East have increased, and any further disturbances to global oil supply and oil prices, could shift our outlook for inflation and consumer spending.

We expect global growth will stabilise at around 2.8% in 2020.

Our central view is that the ‘late cycle’ expansion is set to continue into 2020. However, despite some of the aforementioned developments, we still expect more of an ‘L-shaped’ growth trajectory over the next two years, rather than the kind of ‘V-shaped’ reacceleration that has followed previous industrial downturns during the current expansion.

US-China trade tensions had eased into year end but we expect the persistent uncertainty regarding future trade negotiations to continue to weigh on investment spending and global trade for a number of years to come. The bulk of monetary policy easing is now in the past for developed markets (DM). Although some emerging market (EM) central banks - including China - still have room for further stimulus, the efficacy of that easing is likely to be modest. And, while there is significant space for fiscal policy easing in a number of economies, the political will to act in most cases appears limited unless there is a further significant slowing in growth. Furthermore, the global cycle is far more advanced now than it was in the last industrial recession, leaving less spare capacity to grow into.

In summary, we expect global growth will stabilise at around 2.8% in 2020. However, that masks important regional divergences, as EM growth (ex-China) is expected to improve while US and Chinese growth moderates. In 2021, we expect global growth to improve moderately to 3.1%, driven by improvement in both EM and DM. However, none of the major economies are likely to grow at rates above their post-crisis average (see Table 1). Against this subdued growth backdrop, underlying inflation rates should remain low and within a narrow range, although, the recent escalation of US-Iran tensions raises the potential for inflationary risks driven by rising oil prices.

Monetary policy outlook: loosening expected to stabilise, but not boost, growth

The constraints on monetary policy are a particularly important driver of our cautious outlook. Although there is scope for further easing across some developed economies, the transmission is likely to be weaker than in the earlier stages of the expansion. This is particularly true for economies such as the Eurozone and Japan, where interest rates are not far from the effective lower bound. Meanwhile, excess leverage will likely inhibit credit demand and supply in countries such as India, Australia, Canada and Sweden, while financial stability concerns may constrain more aggressive easing from the People’s Bank of China (PBoC).

The US Federal Reserve (Fed) is the one major developed economy central bank with more room to manoeuvre. But, seemingly satisfied that the 75bp of interest rate cuts delivered in 2019 are sufficient for them to make further progress on their employment and inflation mandates, Chairman Powell has signalled a pause in the easing cycle. Any future cuts are likely to be dependent upon either a re-escalation of trade tensions or for the economy to perform notably worse than the Fed’s forecasts. Because we are fearful of the latter - our forecasts are for growth to slow to 1.4% in 2020, well-below the Fed’s expectations - we believe the Fed will be forced to cut rate by at least another 25bp in this cycle.

In the European Central Bank’s (ECB) case, policy constraints are more binding. Following the stimulus package delivered in September, the ECB simply has less room to act - at least unless there are more radical changes in its policy framework. As a consequence, we expect the ECB to cut the deposit rate by only 10bps in 2020 and a further 10bps in 2021, despite the likelihood of an extended period of below-target inflation. Meanwhile, in the UK, with no-deal Brexit risk delayed until year end, we anticipate that the Bank of England will hold the base rate steady at 0.75%, unless Brexit related downside growth risks escalate, raising the prospect of cuts.

China is also struggling under a variety of policy constraints. The PBoC has taken a far more cautious and targeted approach to stimulus compared with previous cycles, as financial stability objectives have trumped the desire to reinvigorate growth. Cautious efforts to stimulate the economy continue, with the announcement of additional liquidity for the banking sector and the encouragement of investment through increased local government bond financing. Yet, further tightening in standards, particularly in mortgage lending, weighed on loan growth in October, while loan demand remain subdued.

The attenuation of the current Chinese financial cycle compared with previous cycles will not only keep Chinese growth on a moderating trend, but will also constrain growth in those emerging economies most closely correlated with the Chinese cycle. That in turn will keep up the pressure for more policy easing elsewhere. Fortunately, the fact that real policy rates are still close to long-term averages means that there is significant space to act.

In Brazil, for example, subdued growth, the large output gap, below-target inflation, as well as ongoing fiscal consolidation have combined to allow the central bank to cut rates rapidly by 150bps since the summer, with potential for a further 50bp of easing in the coming months. In India, although the central bank surprised markets by leaving rates unchanged in December, the door has been left open for further easing early next year as activity growth remains lacklustre.

Monitoring spillovers from industrial to service sector

Our central view is that the current global industrial slowdown is not a sufficiently large shock to derail the global expansion. Key to that view is the continued resilience of labour markets and consumption growth, particularly in the US, which is still the most important driver of the global economy. Indeed, investor confidence in that resilience has been key to markets pricing out recession risks over the course of the past few months. It is therefore important to scrutinise that resilience thesis carefully.

In truth, employment growth has been on a moderating trend, with the annual growth rate across the OECD declining from 1.7% y/y in Q1 2018 to just under 1% y/y in Q2 2019. However, even those more modest rates are above the underlying growth in the working age population and thus unemployment rates have continued to trend down, albeit more slowly. Moreover, slowing employment growth has been partially offset by the gradual upward trend in wage growth, keeping disposable income growth fairly steady and at rates more than capable of sustaining the expansion (Chart 1).

Chart 1: Global wage offset

Source: OECD, Haver (as of Q2 2019)

The employment and wage backdrop, although key for determining consumption trends, is, however, inherently backward-looking. Spending patterns can begin to shift well in advance of any meaningful shift in unemployment trends, as households become more cautious about future employment prospects and the outlook for personal finances. One leading signal which can capture this caution is spending on durable goods. Households may become reluctant to spend on big-ticket items once they turn more risk averse. Durable goods expenditure may only account for around 10% of overall consumption in the US. However, historically, it has provided an early warning for recessionary risks.

Our analysis of the US consumer shows that a key feature of prior technical recessions since the 1970s, is the rapid deceleration in durable goods spending one-to-two quarters ahead of the turning point in aggregate GDP. The CBO classify 2001 as a recession given that the US economy experienced a significant decline in economic activity, although it was not a technical recession with two consecutive quarters of real GDP contraction. During this period, the annual growth rate of durable goods spending slowed, but did not move into negative territory ahead of (or during) the deceleration of GDP growth. In that instance, the recessionary trigger was specifically the collapse of equity and technology investment bubbles. In all other recessions, consumer durables consistently moved into negative territory one-to-two quarters before aggregate consumption and GDP (see Chart 2).

Chart 2: Resilience in durable goods spending is encouraging

Source: US Bureau of Economic Analysis, Haver, Aberdeen Standard Investments (as of Q3 2019)

Consumer support likely to continue in the US

Key to our view for a continuation of healthy growth in durable goods consumption is our assessment that there are no major, systemic imbalances threatening the US household sector. The November employment report showed that hiring activity remains robust and that there has been little spillover of weakness in the manufacturing sector into services employment. Consumer sentiment also remains at very healthy levels. Beyond the resilience of the labour market, we are encouraged by the fact that household leverage remains well-below the pre-financial crisis peak. The cycle in durable goods spending (and housing activity) has also been subdued by historical standards. True, there are pockets of concern like auto-lending to lower-quality borrowers and the rapid post-crisis growth of student loans, but these are not large enough to be regarded as systemic, particularly with interest rates anchored at low levels.

The upshot is that the trigger for the end of the current expansion is unlikely to come from imbalances within the household sector itself. As a consequence, it is the US-China trade and technology conflict we are monitoring most closely. A further increase in trade barriers could trigger a sharper drop in investment activity and corporate profits, particularly against the backdrop of high corporate leverage. This would in turn trigger a tightening in lending standards to businesses, and curtailment of hiring activity. For now, though, that remains a tail risk.

Different concerns for Europe

Turning to the eurozone, we see again that in a similar vein to the US, durable goods spending leads aggregate consumption growth by around one quarter. Like the US, unemployment is at multi-decade lows, wage growth is robust and household demand for credit is on a rising trend, supported by ultra-accommodative monetary policy.

Elsewhere, it is worth noting that consumer spending is not as dominant a driver of the cycle as it is in the US, especially in Germany. Historically, trade and investment activity has been more important because of the region’s dependence on external demand, particularly in the early stages of downturns. The latest survey and industrial production data imply that the industrial recession has further to run in the Eurozone for a number of months to come. Whilst leading indicators have started to stabilize, we expect any recovery in the Eurozone industrial cycle to lag that of the broader global recovery.

Table 1: Global forecast summary

Source: Aberdeen Standard Investments, Bloomberg (as of January 2020) N.B. Consensus forecasts are compiled by Bloomberg Forecasts are not guaranteed and actual events or results may differ materially.


We expect global growth will stabilise at around 2.8% in 2020.

The Future of

Chapter 3


Aymeric Forest, Global Head of Multi-Asset Solutions

What should investors expect from a diversified multi-asset strategy? Has it always worked and what does the future hold?

Back in the 1950s, Harry Markowitz, Nobel Laureate and pioneer of investment theory, called diversification “the only free lunch in finance”. It offers the prospect of reducing risk without sacrificing returns.

Diversification may well be key in 2020 and beyond

What has been interesting is that as multi-asset has evolved an intrinsic link between multi-asset and diversification has been established. There are a number of ways to diversify; through asset classes, from public to private markets, using specific idiosyncratic strategies, and tactical and strategic strategies over differing time horizon are a few examples. However, diversification hasn't always been helpful.

The two major equity bear markets during the last two decades tested Markowitz’s theory. Traditional balanced portfolios suffered significant declines during the bursting of the dotcom bubble. Gains from government bonds were insufficient to offset equity losses. Investors responded by diversifying across a broader range of asset classes and strategies. Yet most multi-asset funds suffered similar declines during the global financial crisis.

The recovery from the 2009 lows has provided a different challenge. Most diversified multi-asset portfolios have lagged equity markets since the last crisis.

Of course, with hindsight, it's easy to say over the last 10 years, an equity/bond split of 60/40 would have done the job. However the current environment differs greatly from the previous decade, and likely from those to come.

Today, bond yields across the developed markets are extremely low. They offer little protection to investors if inflation picks up. Some preferred equity market valuations may appear rich, leaving markets vulnerable when this elongated economic cycle ends. This increases the appeal of alternative asset classes that are driven by different fundamentals, although their sensitivity to ongoing injection of liquidity and low cost of financing shouldn’t be underestimated.

One thing that seems evident is that there are some big themes that have emerged over the last 20 years and that will continue to matter, and increasingly so. Diversification may well be key in 2020 and beyond.

What should investors expect from a diversified multi-asset portfolio?

We see six trends that are reshaping portfolio construction.

First, the shift from traditional to alternative asset classes is set to continue. The regulatory pressures for banks to increase equity capital will restrain bank lending. In addition, the nature of investment is changing. Investment in intangible assets exceeds investment in tangible assets in the US and the UK. These investments involve greater uncertainty over their expected return. They are more readily financed by private than public markets, which will have to be carefully balanced in portfolios with appropriate investment horizons.

Second, investors are integrating environmental, social and governance (ESG) analysis into their decision-making process. Understanding the risks and opportunities presented by ESG issues is a fundamental ingredient of investment, alongside traditional analysis.

Third, rapid economic progress means the ‘emerging market’ label no longer captures the whole story. Emerging economies account for 60% of global activity. Yet their financial assets make up only 10% of the global financial system (Chart 1). As these markets increasingly open up to investors, asset owners will need to gain access to the full range of investment opportunities to provide true and active diversification.

Chart 1: Emerging shift in activity

Source: IMF, Refinitiv Datastream, Aberdeen Standard Investments (as of 31 December 2019)

Fourth, advances in computer science allow a more granular analysis of diversification. However, quantitative risk models don’t have perfect insights and may have some limitations. A qualitative assessment of risk and return and a focus on forward looking risk scenario analysis will remain vital to achieving effective diversification and downside risk management.

Fifth, regulatory regimes are modernising in many countries. For insurance companies and pension schemes, this exposes any mismatch of assets and liabilities. They will need to embrace a more sophisticated approach to risk management.

Sixth, individuals will have to take more responsibility for their financial futures. Neither the state nor their employers will provide generous pensions. The asset management industry can help. It can provide the right tools, solutions and advice. These solutions must include making this broader range of investments accessible to all.

Many in the industry, including ourselves, have suffered from a lack of concentration risk. For example, by being too diverse on the equity side. At some point, it does matter to be concentrated. Diversification for the sake of diversification doesn’t work. It is very much a matter of trying to be flexible enough and proactive in understanding the area that has a proponent for growth and the one that, for example, is cheap, but cheap for a reason.

Whether this is the end of quantitative easing (QE) is widely debated. Either way, asset classes are going to be a lot more sensitive to changes in the direction of rates and monetary policy as our economies dependency to debt is growing.

However, we have more levers to pull and increased conviction in where we want to put our clients’ money. This can be done in a diversified way, but it will have to be done with conviction and by being selective, while remaining flexible in this environment.

Increased diversification brings increased choice. Benefiting from this more diversified approach requires skill and experience in a broader range of investments. This extra effort can bring rewards. If executed well, diversification can lead to improved long-term returns delivered in a smoother fashion.

So was Markowitz right to describe diversification as “the only free lunch in finance”? Not a free lunch perhaps, but definitely a healthy balanced diet.


Diversification may well be key in 2020 and beyond

Hindsight is 20-20 but
investors should not be

Chapter 4


Stephanie Kelly, Senior Political Economist

Following a rocky 2019 in the UK and US, 2020 may look less challenging at first glance but investors must focus on the medium term challenges that persist.

In 2019, politics provided some challenging episodes for investors. The US-China trade war left average tariffs on Chinese goods in the US more than 10ppts higher. The Italian coalition government collapsed when Lega leader Salvini withdrew his support and a snap election that secured a Eurosceptic right-wing government looked all but certain. We all await the outcome of the current tensions in the Middle East. Meanwhile in the UK, Brexit negotiations went down to the wire in advance of the 31 October deadline and a snap election led to frantic campaigning by both parties at year end.

The 2020 US election campaign will bring plenty of lumps and bumps for investors before and after Election Day.

Investors would be justified in pointing to the outcomes of these events as signs that political risk is actually lower now. The US and China have agreed a Phase One trade deal that removed some of the existing tariffs and prevented the next round of escalation. An alternative coalition was built in Italy to avoid snap elections, with the moderate PD party working with the 5 Star movement. In the UK, having secured a last-minute withdrawal agreement with the European Union (EU), the Conservative government went on to win the election with a sizeable majority. This removed the risk of another snap election for the time being.

However, we must not assume that, because the end of 2019 provided some relief for investors, 2020 will not see these risks return or new ones take their place. Crucially, when we zoom out from the short term event risk, the longer term drivers of political risk remain in place. Populism, fragmentation and polarisation continue to define the political spectrum in many key markets. This is being facilitated and accelerated by changes in how people communicate and consume news media. It reflects deep cultural and economic change and challenges that have been building for decades and are showing few signs of reverting.

Don’t take your eye off US-China relations

The US-China Phase One deal reinforces our views on the calculations being made by the Trump administration. While Mr Trump continues to see tariffs as important leverage in negotiation, the December tariffs presented too much of a risk for the President heading into a re-election year. It is noticeable that the goods covered by the planned December tariffs were largely final consumption goods. These would have hit voters directly; the equivalent of putting a tax on consumers.

Importantly, our other key assumption about the Trump administration still holds. President Trump is the ultimate arbiter of the fairness and success of the deal. His trade-hawk tendencies reflect deep concerns among the electorate about Chinese trade, intellectual property and cybersecurity practices. Against that backdrop, we see this deal as a temporary truce in the gradual, often volatile, uncoupling of the two economies. The extremely high ambitions for goods purchases touted by the US Trade Representative only reinforce our concerns that this truce may not hold.

More to political risk than tariffs

It is also important to bear in mind that, while tariff escalation has halted for now, we are still seeing increasing non-tariff barriers to trade between the US and China. This is likely to continue in 2020, given the cross-party support for non-tariff action. We believe this will continue to drive a regulatory wedge between the two economies.

However, 2020 will also see a crucial event set to determine US-China relations and much more, including the US Presidential and Congressional elections in November. The Democratic Party is focused on regulating energy, financials, healthcare and big tech, major sectors of the S&P500. Investors may face the prospect of a more left-wing Democratic Party than under Obama. Or they may see the re-election of President Trump, whose unpredictability and protectionist impulses bring different challenges. One thing seems certain: the 2020 US election campaign will bring plenty of lumps and bumps for investors before and after election day.

Plenty of Brexit cliff-edges around the corner

Meanwhile, the UK has just held a general election. Although investors were quick to celebrate Boris Johnson’s re-election as Prime Minister, with a large majority, the political realities are complex. While fiscal policy will provide support to the UK economy, Brexit policy is now under the full control of a government that is seeking a relatively minimal free trade deal on goods. This creates huge uncertainty in both goods and, crucially, services sector trade, particularly given the role that regulations play in allowing close economic relations between the UK and EU. The extent of economic divergence is difficult to estimate before the details of a deal are clear. Naturally, this creates high levels of uncertainty for investors regarding the UK's economic outlook.

Chart 1: A tight schedule

Source: European Commission, Aberdeen Standard Investments (as of January 2020)


The 2020 US election campaign will bring plenty of lumps and bumps for investors before and after Election Day.

Can another mid-cycle
recovery develop new
currency trends?

Chapter 5


Ken Dickson, Investment Director FX Research

Last year, instead of a return to global growth and a weaker US dollar, currency volatility simply dropped further. We foresee late-cycle stabilisation and so are unconvinced that clear currency trends will re-emerge in 2020.

Global monetary easing triggered lower currency volatility

Defensive currencies like the Japanese yen acted as very good diversifiers in 2019.

Last year, global growth economic faltered relative to expectations, and political uncertainty grew. These developments triggered further, synchronised, global monetary policy easing so that currency market volatility fell and foreign exchange trends were limited (Chart 1). The US Federal Reserve eased monetary policy as expected and interest rate differentials narrowed a little. However, elevated risk aversion and still-strong relative US GDP growth – so-called US exceptionalism – kept the US dollar strong. The best performers on a total return basis were some of the most volatile currencies where real rates tightened sharply higher. Cyclical currencies where monetary policy eased fared less well. Defensive currencies like the Japanese yen acted as very good diversifiers, performing well in risk-averse phases but with limited underperformance at other points during the year.

Chart 1: Cheap money, low volaitlity environment

Source: Refinitiv Datastream, Bloomberg, JP Morgan (as of 31 December 2019)

Differing outlooks for this year

Commentators are starting to revert to 2019 hopes of global recovery and unwinding political uncertainty. These views also trigger an often default stance expecting a levelling up of global economic activity, followed by renewed capital flow into Europe and Asia. This, they believe, will allow the overvalued, overbought US dollar to reverse course. Our Research Institute’s expectations for the year are less sanguine than the current market outlook. Our updated global growth forecasts note that monetary support delivered this year will support the real economy and monetary policy easing, which has already seen interest-sensitive parts of the global economy tick higher. However, we expect any recovery in global growth to look much more like an ‘L’ rather than a ‘V-shaped’ recovery. The transmission of monetary easing will be weaker than at earlier points in the expansion and, at any rate, policy space is very low in the Eurozone and Japan. Although there is increasing noise around fiscal stimulus, there are still no plans across major economies that will deliver meaningful economic impetus without the lurch towards another economic crisis. Indeed, we expect the world’s two largest economies – the US and China – to actually slow further in 2020.

There are continued indications that the most acute phase of global political uncertainty may be over, with the US and China pulling back from their rapidly escalating trade war. Yet, trade barriers between the US and China remain very high. More fundamentally, the deep drivers of the volatile global political environment remain in place, and populist politics continue to thrive in many countries. Therefore, global policy uncertainty, while slightly moderated, is likely to remain a headwind for economic activity.

This all suggests that the low-yield, low-return, low-volatility environment will continue, with changes to our outlook remaining marginal rather than significant. Nevertheless, there are differences to the policy environment that will help inform our currency view for this year.

A new order in the defensive currency league

We noted above that countries pursuing negative interest rate policies (NIRP) are beginning to lose the capability and the appetite to retain this stance. These funding and defensive currencies are undervalued and have built up a large stock of short positions over the years. Any improvement in economic activity in these countries will bring a significant change in sentiment and the risk of a short squeeze. To a degree, this is already in play and we see another year of improving performance for the yen, buoyed by its being the best diversifier with least room to ease monetary policy.

The defensive characteristics of the US dollar are less clear, as it is widely acknowledged the dollar is overbought and overvalued. Therefore, developments in the domestic US economic and political sphere will dominate over international considerations. We foresee a slow relative deterioration in US drivers but 2020 might not yet be the year that non-US growth can surpass the current US exceptionalism. A modestly weaker dollar view is therefore favoured from our baseline expectations.

We actually see greater arguments for a euro ‘smile’, given the dramatic increase in cross-border hedging, funding and financing activity over recent years. Capital outflows, in addition to the negative interest rate, more than offset the European current account surplus and pulled the euro weaker last year. The smile concept suggests that the euro can appreciate if domestic growth significantly outperforms other economies, or where risk aversion peaks and money returns home from riskier markets. The euro will underperform on a total return basis in the case where global growth is underwhelming – an expectation much closer to our central case than the smile’s other extremes.

Global economic stability will help emerging market currencies with falling real rates

Emerging markets (EM) should provide another important currency driver for this year. There is still greater scope for policy easing across EMs, where real rates remains relatively high compared with the past fifteen years. In contrast to 2019 where the better EM currency performers needed to bolster real interest rates, a more stable global environment will help reward currencies like the Mexican peso, whose real trades can ease further as potential growth attracts capital inflow. However, the Brazilian Real and Turkish lira are two currencies where real rates are well below historical averages. For these currencies, there is a growing risk that, without improving economic fundamentals, increased currency volatility will erode returns from interest rate differentials.


Defensive currencies like the Japanese yen acted as very good diversifiers in 2019.

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