EN United States Institutional
Macroeconomic & Geopolitical

The Cruelest Month May Come Early This Year

31 January 2020 - 3 min read

The forecasts told us 2020 should be smooth and any turbulence wouldn’t come until later, if it came at all. Yet, we’re one month in and already risk is beginning to loom across three continents’ horizons.

A year that launched on a burst of good economic data, a gentle market froth and a zest of nervous optimism now faces large air pockets in Asia, the U.S. and Europe. The threats may dissipate noiselessly, but we should know very soon if the base case is resilient enough to withstand the coronavirus, the U.S. elections and renewed trans-Atlantic trade friction.

The cruelest month is meant to be April, when hopes of spring are dashed by icy rainstorms. This year, it may arrive early. 

So far, the current outlook still looks pretty good. Fading political tensions around trade and Brexit, the logic goes, will allow ample central bank liquidity to bolster consumer confidence, financial markets and even a renewal in capital spending.

Until now, China’s efforts to support growth have been playing out nicely. Targeted spending and monetary support last year restored confidence that the government still had control of the slowing economy amid trade tensions with the United States and its own efforts to rein in excessive credit growth. The early results show recovery in economic activity with few inflationary pressures and fresh demand that offered good news to its neighbors.

CHINA ACTIVITY

Source: Factset. As of January 31, 2020.

SOUTH KOREA EXPORTS VS. GLOBAL EPS

Source: Factset. As of January 31, 2020.

We will know much more in the coming weeks if this story might unravel as we gauge how far and fast the deadly coronavirus spreads. For investors, the problem is that analysts make terrible doctors. Any downgrades to earnings forecasts require heroic guesses about the impact on economic activity, which are based on assumptions about damaged sentiment, which depend on highly uncertain models of contagion rates.

So far, the virus seems less fatal than the SARS virus that ultimately killed nearly 800 people in 2002–03. But China’s economy has risen from 4% of global GDP to four times that, and its flow of goods, services and people is far greater now than it was almost two decades ago. The end of the extended New Year’s holiday this week should prove especially telling as the country gets back to work and growth forecasts may have to be cut.

"For investors, the problem is that analysts make terrible doctors."

The U.S. economy is unlikely to come unraveled this month, but investors will be watching closely as the U.S. political picture comes into focus. The Democratic primary contest officially kicks off today in Iowa, followed by New Hampshire, Nevada and South Carolina later this month. Such a front-loaded calendar means that a third of all delegates will be pledged by the end of Super Tuesday on March 3. 

The polls are entirely unhelpful at this stage, as are the prediction markets. We may finish the month with a centrist candidate clearly headed for the nomination; or it could be one of the more extreme alternatives. Some suggest that wins for Elizabeth Warren or Bernie Sanders might ultimately support markets, as their success would boost President Donald Trump’s chances of winning re-election. But it’s a long time until November and even a small chance of a dramatic reorientation of U.S. economic policy will likely trigger volatility. 

And there is a third, potentially more unsettling scenario. With so many candidates enjoying so much financial support—not to speak of the self-funding billionaires—we might grind through the spring and early summer to arrive in Milwaukee on July 13 with three or more viable candidates and the added uncertainty of a messy brokered convention.

DEMOCRATIC PRESIDENTIAL NOMINATION POLL
RCP National poll average

Source: Real Clear Politics. As of January 31, 2020.

In Europe, the potential risks this month look a little more diffuse, but the economic recovery is more fragile, too. The official Brexit last week has apparently cleared a major uncertainty that dogged markets last year, and Prime Minister Boris Johnson has even banned the word from further official use. Meanwhile, economic sentiment has turned positive across the euro area, too.

EURO AREA AND U.K. PMI

Source: Factset. As of January 31, 2020.

But just as things are hardly ever as bad as they seem in Europe, they are also rarely as good as they seem. Britain’s new legal status merely kicks off another set of complex negotiations that need to deliver a revamped trade deal by December 31 or risk triggering disruptive change in tariffs. 

More damaging would be an escalation in trade tensions with the United States, as President Trump turns his attention from China to the European auto exports that he has publicly deemed a threat to U.S. industry and national security. There may be a path to avoid confrontation on European taxes targeting U.S. digital firms as long as progress continues on multilateral tax policy. But the 15-year-old row over government subsidies to Airbus and Boeing will surely escalate with a looming decision that is expected to favor Europe.

We all suspected that the sunny market scenarios for 2020 sounded too good to be true as we wrote them, although it was difficult to pinpoint exactly which clouds might appear first. The risks coming sharply into view this month will test the resilience of our cheery outlook sooner than expected.

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

20-1076854

X

We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.