Citi Outlook 2020: Back to the Future

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Summary

Advanced economy central banks traveled back in time and returned to their easy monetary policies of the past in order to save their future economic expansions. Combined with easing U.S. — China trade tensions, this led to a powerful equity market rally in 2019 with the MSCI All Country World Index rising north of 20% year-to-date.

The global economy appears to be stabilizing. Risks may still be tilted to the downside, but we are not forecasting a global (or U.S.) recession in 2020. Citi’s economists think that global growth will settle in around 2.7% year-on-year in both 2020 and 2021 as global manufacturing activity rebounds. Trade tensions remain a risk with many details yet to be settled, but at least tensions are not rising as they were in early-to-mid 2019.

We think that the bull market remains intact and believe that global equities could return 6.0% to 8.0% in 2020. In the United States, Citi is looking for similar returns with a year-end S&P 500 target of 3,375. Sectors that are most sensitive to the economic cycle (or cyclicals) may have further room to run. However, we are viewing the back half of 2020 through a more defensive lens with the U.S. Presidential election quickly approaching.

The Federal Reserve has signaled that it will likely remain “on-hold” through 2020 and Citi’s economists agree. After hiking interest rates four times in 2018, the Fed has nearly unwound all of those rate hikes by cutting rates three times in 2019. Exactly three rate cuts is consistent with “insurance cuts” of the past (1995-1996 and 1998). We do not envision another rate cut, but the bar is set much lower for a cut than it is for a hike.

There are early signs that growth may be stabilizing

The global economy and financial markets diverged greatly in 2019 with many regions of the world facing downside risks as global trade volumes slowed. This slowdown was felt acutely on the manufacturing side of the economy in many regions. Fortunately, there are some signs that global manufacturing activity may be starting to stabilize (see figure 1).

Figure 1: Global Manufacturing Purchasing Managers Index (Using Markit Mfg. for U.S.)Barring a notable re-escalation of trade tensions, we expect the stabilization in manufacturing to lead to a bottoming out of global growth in the first half of 2020. According to Citi’s economists, global growth should stabilize at around 2.7% year-on-year. In the United States, growth seems likely to advance by about 2.0% year-on-year as weak business investment continues to weigh on growth. With a phase-one trade agreement between the U.S. and China likely to be signed in early January, it is possible that business investment could rebound alongside business confidence (see figure 2). However, we think that rising tax policy uncertainty heading into the 2020 U.S. Presidential election may limit the potential upside.

Figure 2: ISM Manufacturing Production Index vs. Business Roundtable CEO Confidence

Business confidence is likely to remain challenged in 2020

Away from the United States, Citi’s economists think that 2020 could be the year of upgrades to real GDP growth for the Euro Area (see figure 3). They see clear signs of stabilization and believe that a combination of continued fiscal policy support and constant monetary policy accommodation could lead to a pick-up in economic activity from the start of 2020 with GDP growth averaging around an annualized rate of about 1.4% by the end of 2020. In China, growth looks likely to slide further – falling from 6.2% in 2019 to 5.8% in 2020. Even with a phase-one trade deal, we think that exports will slow and continue to weigh on the region as some tariffs are expected to remain in place for the time being.

Figure 3: Regional GDP Growth (Year-on-Year %)

From https://marketinsights.citi.com/marketoutlook/2020-back-to-the-future/

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