Europe's Time to Shine?

December 2019 – 2 min read
If Brexit headwinds begin to clear, and the German economy sees improvement, it would support the European economy as a whole. At the same time, any weakness in the U.S. dollar could further propel international markets, potentially reversing a decade of underperformance.

Biggest Risk

From a macro perspective, there are two types of risk we’re watching closely. One is a series of cyclical risks driven by the fact that we're late in the cycle. Specifically, there are questions around how long the strength of the U.S. consumer can persist, and the extent to which that will continue to drive global growth. With these concerns, there appear to be rising doubts over fixed-asset investments. In general, that portion of the economy has been lagging for a couple of years, mainly due to uncertainty around global trade and the broader outlook. When there is uncertainty over how or when the global supply chain will be impacted by tariffs, business investment tends to decline. So we think one of the biggest risks going into 2020 is that business investment doesn’t recover. 

The other risk is a secular trend that’s building around climate risks and climate policy. Regardless of where you stand on the science of climate, these factors appear to be moving toward the center of investors' concerns. Rules are changing, laws are changing, regulations are changing; in some parts of the world, the cost of carbon is changing. And the technology around energy, energy production and energy transformation is also changing. Whether are not these concerns become front-and-center next year is uncertain, but they are undoubtedly advancing quickly.
 

Biggest Opportunity

Many of the biggest opportunities we see heading into 2020 revolve around technology. We appear to be on the cusp of some very disruptive changes from the Internet of Things. Specifically, we're seeing a convergence of forces around cloud technology, cloud storage, inexpensive sensor technology, mobile networks and data analysis. Advancements in these areas have allowed us to monitor and manage the physical world in ways we never imagined, even 20 years ago. From less downtime for airplanes to more productivity for oil rigs, these growing capabilities have created opportunities for businesses across the economy. And on the flip side, businesses that are not seriously considering how to take advantage of these technologies are likely to be disrupted by competitors who can.
 

Prediction

This may not be particularly bold, but one mildly courageous prediction is that 2020 turns out better than current sentiment suggests. There is a good deal of uncertainty in the market right now, particularly around the political and economic outlook. But in our view, it’s entirely plausible that we see a year in which inflation remains under control, driving central banks down a more accommodative path and providing support to company earnings. It’s also possible that we continue to see decent economic growth, and that the political headwinds we're bracing for end up being less severe than expected.

A slightly bolder prediction would be that Europe and emerging markets outperform the U.S. after a long period of underperformance. If some of the headwinds around Brexit begin to clear, which seems to be the direction we’re headed, it would be supportive of the economy as a whole. The German economy—the biggest in Europe—could also see improvement, particularly if the government provides even a little fiscal support. Finally, any weakness in the U.S. dollar would have the potential to further propel international markets—especially emerging markets—in the year ahead, potentially reversing a decade of underperformance.
 

ARE INTERNATIONAL AND EMERGING EQUITIES SET TO OUTPERFORM?
GLOBAL EQUITY MARKETS INDEXED PRICE RETURN

Source: Bloomberg. As of November 25, 2019

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