Despite a strong year for most asset classes in 2019, there remain numerous sources of investor nervousness as we move closer to 2020 - such as the US-China trade war, climate change inaction and even a Corbyn-led UK government. Below, 12 investors share what is frightening them most this Halloween:
Central bank arsenals are empty
Arif Husain, head of international fixed income at T. Rowe Price
For more than a decade, developed countries have been stuck in a low‑inflation environment despite the best efforts of central banks to engineer pressure on prices. This setting has been a significant driver of the sharp decline in rates, which has pushed a large number of government bond yields to historic lows and a record amount into negative‑yield territory.
Markets are painting a bleak picture for the inflation outlook, which is worrying central banks as they already used an arsenal of tools over the years attempting to revive it. From interest rate cuts to bond buying and cheap lending to banks, central banks have done as much as they can.
It is now time for governments to step up to help stimulate the economy.
Action needed to save the rainforests
Henning Padberg and Thomas Sørensen, portfolio managers of Nordea's Global Climate and Environment strategy
We recently watched in disbelief as parts of the Amazonian rainforest burned out of control, largely due to a dramatic increase in deforestation.
About 17% of the rainforest has been destroyed over the past 50 years, and losses are on the rise. Between 1990 and 2016, the world lost 1.3 million square kilometres of forest - an area larger than South Africa.
If society wants to ensure our planet's forests and rainforests will be here for future generations, we must get serious about protecting these vital assets — and investors can play an important role. While the great forests of the world may seem distant from our everyday lives, consumers and corporates have the ability to effect meaningful change. Consumer demands, expectations and buying decisions are very powerful and drive increasing business momentum towards more sustainable and less environmentally harmful solutions.
Continued growth softness in China
Nathan Sheets, chief economist and head of global macroeconomic research at PGIM Fixed Income
China's economy this year has shown more underlying softness than we had expected, and the authorities' corresponding stimulus measures have been less forceful. By our reckoning, this soft performance reflects the imprint of the trade war, the long tail of last year's de-risking campaign, but perhaps also some deeper slowing in the domestic economy. In tandem, China's high debt levels are limiting authorities' appetite for largescale stimulus packages like those deployed in previous episodes.
That said, our read is the policy stance has again turned toward stimulus, albeit likely of moderate size, and President Xi remains committed to his 6-6.5% growth target for this year. However, growth in 2020 will most likely have a 5% handle.
Impact of ongoing trade war
Jeremy Lang, partner and co-founder of Ardevora Asset Management
We still believe most people are too relaxed about the degree of negative impact a prolonged trade war will have, but at least they have come around to the idea that a trade war is here to stay. This is good for stock markets since, as the cliché goes, more is now in the price.
In addition, and of greater impact, central bankers appear to have changed their view on the trade war. There has been a remarkable flip, especially in the US, on the likely path of interest rates. The Federal Reserve has moved from strongly signalling an intention to raise interest rates earlier in the year, to a position of clearly signalling multiple rate cuts. This reflects a clear acceptance the trade war is here to stay and will have a dampening impact on growth, which requires a policy response.
Mindful of US consumer expectations
Brad Tank, CIO and global head of fixed income at Neuberger Berman
Global growth downside risks are centred on the US consumer. The global economy continues to evolve, but with 25% of global GDP, the US remains the largest swing factor in the global economy. If there is one chart to pay attention to over the coming quarters, it is personal consumption expenditure growth rates. We see little that should disturb the current trend. Unemployment remains low, wage gains are stable to accelerating and businesses report increasing interest in hiring.
However, consumer spending is not formulaic but tied to households' desire for precautionary savings and expectations for future earnings. We may not exactly be able to talk ourselves into a recession, but we will be focused on the interaction between actual consumer spending and consumer expectations in the US, as a change in household spending patterns in the US is the most significant risk to global growth.
PM Corbyn may punish property
Rogier Quirijns, portfolio manager of the Cohen & Steers European Real Estate Securities strategy
A Corbyn administration's impact on the UK property market could even be more damaging than the fallout from Brexit. Corbyn's long-held agenda is not business friendly, which could increase the risk within the office property space. Higher taxes would also hit consumers hard and, by extension, the retail property market.
One of Corbyn's first targets would likely be high-end London houses. In a bid to try increase availability of affordable homes in the capital, a Corbyn-led government would likely curb foreign property ownership - which would have a detrimental impact on prices across the board.
Risks of reaching for income
David Katimbo-Mugwanya, co-lead portfolio manager of the EdenTree Amity Sterling Bond Fund
With yields having collapsed beneath previous all-time lows on the back of heightened global geopolitical uncertainty, gilts have arguably crossed the Rubicon in regard to use as an income-generating asset class. It is imperative for active managers to navigate this lower-income environment with care, steering clear of undue risks to investors' capital.
While monetary policy has been the instrument of choice in supporting the post-financial crisis global economy, doubts are beginning to surface about the sustainability of this strategy in tackling the next downturn. It is therefore crucial investors also take stock of the available policy toolkit, particularly as the universe of negative-yielding instruments expands. Going forward, it is more likely fiscal measures will bear a greater burden of the policy efforts required to boost growth.
Investors remaining risk-off
Tony Yarrow, co-portfolio manager of the TB Wise Multi-Asset Income Fund
This morning I woke up from an unsettling dream in which President Trump had become transformed into an outsized pumpkin in tight chequered trousers and ballet shoes, perched on top of a ‘beautiful wall'. In the background, I could hear voices singing:
‘All the King's horses and all the King's men
Couldn't put Trumpty together again'Back in the real world, my greatest fear is that as the secular bubble in bonds and bond-proxies starts to roll over, investors will be too nervous to participate in the value rally that has just started, and, as at other major turning points, will remain in ‘risk-off' assets until the best returns have been made.
The end of accommodation
Adrien Pichoud, head of total return strategies at SYZ Asset Management
Our biggest fear for 2020 is that central banks in developed economies step back and do not extend the accommodative stance they embraced in 2019. With lower short-term risks around Brexit and US-China trade tensions, our central economic scenario is one of reasonable optimism, with global growth stabilising next year. However, if the US Federal Reserve and the ECB revert to the normalisation of 2018, we fear equities and bonds could both suffer.
Whether we like it or not, markets and some parts of the economy have become highly sensitive to interest rates and available liquidity. Very accommodative monetary policies will become a permanent feature of our ageing, indebted developed economies - as has been the case in Japan for the past 20 years. As 2018 showed, if central banks withhold treats, they receive tricks - such as unsettled markets, lower inflation expectations and higher downside risks to growth.
Fallout of climate inaction
Ben McEwan, climate active analyst at Sarasin & Partners
The World Economic Forum highlighted environmental risks are both the most probable and most material risks facing the global economy. While extreme weather was the risk of greatest concern, the ‘failure of climate-change mitigation and adaptation' was recognised as the second most impactful and likely risk facing the world. The results of climate inaction are becoming increasingly clear, with the physical manifestations of climate change already increasing.
Accordingly, imminent action to drive emissions lower is required from governments, corporates and civil society. Mitigation involves identifying industries and companies exposed to the reduction of fossil fuel usage and associated release of greenhouse gases into the atmosphere - by reducing the source of greenhouse gases or enhancing the ‘sinks' that accumulate and store these emissions. Meanwhile, adaptation requires reducing the vulnerability of exposed industries and companies to the physical impacts of climate change.
Possibility of an oil shock
Arno Lawrenz, global head of multi-asset strategy at Ashburton Investments
We are in an ultra-accommodative environment, with governments hinting at the possibility of fiscal stimulus, in addition to the ongoing monetary easing from central banks. Therefore, the majority of investor worries stem from geopolitical risks, of which there are many today.
In our view, the primary incident capable of rapidly causing major capital loss for investors would be a shock for oil prices. With US President Donald Trump reviving tensions in the Middle East, we are pricing a higher risk premium into oil prices. Geopolitical events, which typically cannot be forecasted, can have an instant impact on markets, so it is important for investors to remain flexible in asset allocation.
Brexit alters occupier demand
Tom Duncan, senior analyst - investment strategy and risk at Mayfair Capital
UK and European businesses have built deep and complex supply chains over the last 45 years of EU integration. Tariff-related trade barriers will impact the cost of EU goods, as they disrupt the business models of UK exporters and importers. To mitigate the impact of tariffs, UK-based manufacturers serving the EU could relocate abroad to remain part of the single market. Not only would this lead to direct factory closures, for large manufacturers it would adversely impact the myriad local suppliers who depend on them.
However, non-tariff trading barriers could have the biggest impact on occupational demand. Businesses are highly sensitive to transport delays and increased border customs checks would lengthen import times. This may lead to more stock being held within the UK, increasing demand for suitable storage space.