Geopolitics, trade to weigh more on global growth, investor sentiment

2019-11-21 11:45

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NEW YORK, Nov. 20 (Xinhua) -- Global economic growth and investor sentiment will be increasingly eclipsed by geopolitical woes in 2020, including U.S.-China trade tensions and the next U.S. presidential election, according to a yearly outlook report released by leading Swiss financial institution UBS on Wednesday.

Global growth is estimated to bottom out at a rate of around 3 percent in the fourth quarter of 2019 and the first quarter next year. It will then rebound and keep a mildly rising trend for the rest of 2020, said the report titled Year Ahead 2020.

As the global economy is now "a full decade into a historic expansion" following the financial crisis, resolution of trade disputes and a move toward greater monetary and fiscal policy coordination could extend the expansion and lift markets, the Swiss financial institution suggested.


Investors have grown more worried over geopolitical tensions than business fundamentals for the coming year. "From the U.S. presidential election to trade negotiations and fiscal policy, political choices will increasingly shape outcomes," said the report.

Despite slowing growth and falling interest rates, global equities have delivered positive returns over the past 12 months. Yet UBS forecast "muted stock market performance" for 2020. In particular, U.S. stocks would be exposed to higher volatility as the presidential election approaches.

In foreign exchange markets, the U.S. dollar is also expected to weaken next year, as weighed down by lowering U.S. growth and interest rates, uncertainty ahead of the U.S. election and the waning effect of tariffs.

As gold is priced in the dollar, a weaker greenback would push gold prices higher. Moreover, the ongoing political uncertainty and economic worries will send safe-haven flows into gold, making the asset further appreciate.

Yet the prospect for commodities is dampened. As manufacturing and investment activities continue to show little sign to recover further, market surplus in industrial metals and oil tend to emerge.


The U.S.-China trade frictions have markedly hindered global business investment and companies exposed to global trade bore the brunt.

"In the year ahead, volatility among trade- and investment-dependent companies is likely to remain elevated, with returns dependent on political choices," the report noted.

It also pointed out that Brexit and U.S. threats of more tariffs on European goods would intensify a de-globalizing trend.

Although China and the United States have made some progress "toward hammering out a partial interim trade deal," the investment bank urged "a more substantially conciliatory approach" even after the U.S. presidential election.

Against such uncertainty, more stable returns could come from countries and sectors that "derive a high proportion of their revenues domestically," as well as companies exposed to consumer spending rather than business spending.

"A case in point is China because it's a market where 86 percent of revenues are derived domestically. We also favor the United States in the global portfolio (than) the Eurozone," said Tan Minlan, head of the Asia Pacific Investment Office at UBS Global Wealth Management (GWM) Chief Investment Office.

"The U.S. does derive a much higher percentage of its revenue domestically compared to Europe ... In the U.S., we do favor consumer discretionary. In China, we like companies that are exposed to the consumption upgrade trends in lower-tier cities," she said at a media event on Tuesday night.


The U.S. election matters much to investor sentiment, as the greenback comprises 88 percent of currency transactions globally and the country accounts for about 55 percent of the MSCI All Country World index, according to Mike Ryan, Americas chief investment officer at UBS GWM.

"We have to pay a lot of attention to some of the things that emerge from this political debate and ultimately could translate into policy as we head into 2020," Ryan said during the event.

"These are things related to how we gonna treat taxes. We see tax increases especially in the corporate side. Will we see increased regulation? Are we going to see some moves towards how we deal with income and wealth inequality?" Ryan said.

As for regulation, investors should prepare for greater scrutiny of big U.S. technology firms, as U.S. President Donald Trump has indicated that the tech giants could face scrutiny from antitrust regulators.

To navigate through a potentially less favorable political backdrop, UBS highlighted global diversification and balanced asset classes in investors' portfolios, as well as sustainable returns from sectors featuring environmentally and technologically led innovations.

"You need to have representation across different areas of the world, because opportunities are going to be created in emerging markets and other developed markets," said Ryan.
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