Page 8 - ISQ UK JANUARY 2020

INVESTMENT STRATEGY QUARTERLY

“ Trade policy uncertainty and slow global growth,

the two negative factors most often cited across
manufacturing industries, may continue. ”

negative factors most widely cited across manufacturing RECESSION ODDS: FROM RISING TO RETREATING
industries, may continue to some extent. In contrast to A simple yield curve model of recession suggests about a 25%
consumer confidence, which has remained elevated, business chance of a downturn within the next 12 months, down from
sentiment weakened in 2019. 40% in August, but still a little too high for comfort. The main
While a full trade agreement that rolls back tariffs appears risk is that the factors that have restrained capital spending will
unlikely, there is hope for a truce in trade tensions between the worsen, leading to reduced hiring and increased layoffs, but
US and China (i.e., an agreement not to escalate). However, there are currently few signs of a deterioration in labour market
there is a danger of a further separation of the world’s two conditions. Consumer debt appears manageable, but business
largest economies, and protectionist sentiments have risen debt has risen significantly (especially for those with greater
around the world. Tariffs raise costs for US consumers and credit risk, which could make a downturn worse). Investors
businesses, invite retaliation, disrupt supply chains, and should focus on corporate layoff intentions and job offerings,
undermine business investment. Moreover, the administration two early indicators of labour market conditions.
has weakened the World Trade Organization, the arbiter of It is a presidential election year, so political uncertainty will be
global trade disputes. Ahead of the 2020 election, there ought a factor in 2020. The Democratic platform is expected to center
to be incentive for President Trump to put trade issues behind on universal healthcare, climate change, income inequality, tax
him. However, bashing China (and others) on trade plays to his policy, and antitrust/monopoly regulation – any of which would
base, and some of the Democratic contenders have adopted have repercussions for certain corners of the financial markets.
similar anti-China rhetoric. Over the course of the year, investors may begin to fear change
in Washington, but it is unlikely that the Democrats will gain a

Recession Odds Over 60-seat super-majority in the Senate, making it extremely
difficult to raise taxes or to shift the regulatory environment
the Next 12 Months significantly.

40% EMERGING EXPECTATIONS
Outside of the US, the advanced economies face the demographic
40% challenges of aging populations and slower growth in workforces.
30% Disruptions from Brexit are a risk. Emerging economies were
weaker than anticipated in 2019, but are likely to pick up in 2020.
These countries face the same demographic challenges as the
20% 25% advanced economies. However, many have made significant
strides in education and have more room for improvement in
living standards. Over the last decade, emerging economies have
10% become increasingly sensitive to US Federal Reserve policy. The
Fed’s 2019 rate cuts will help. China’s current problems go far
beyond trade policy issues; growth has been fueled more by debt
0% in recent years, there has been a greater reliance on state-owned
AUGUST 2019 DECEMBER 2019
enterprises, and the Chinese economy appears to be less
sensitive to fiscal and monetary policy stimulus.

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