CFM INDOSUEZ Wealth Management - 2019 annual report

18 2 0 2 0 f i n a n c i a l m a r k e t o u t l o o k It would have been excessive to attribute the poor financial market performances in 2018 to an ailing global economy, and it would be incorrect to attribute the strong performances in 2019 to an economic machine firing on all cylinders. So what kind of picture can we draw for 2020? Yes, the equity markets may look “expensive” after soaring almost 30% in 2019 (MSCI World index, in USD), the higher valuation metrics need to be offset by a more robust profit outlook. Government bond yields are expected to remain within a relatively tight range centred on end-2019 levels. 2020 is a US presidential election year, one with a highly uncertain outcome and an unpredictable impact on the financial markets. We would simply point out that, until the Donald Trump presidency, the Fed’s monetary policy was never apparently influenced by the elections or by the president’s membership in either the Democratic or Republican party. These considerations have in part been challenged by the emergence of Covid-19 (a “black swan” to borrow the expression used by Nassim Taleb), an unpredictable event with extreme consequences. As this document goes to press, it is very difficult to quantify the impact of the coronavirus epidemic. What we can say is it is a negative shock affecting supply (production) and demand alike. On one hand uncertainty over growth is on the rise, and on the other uncertainty over monetary policies is on the decline. Monetary policies are poised to become even more accommodative than initially expected, which should mitigate the adverse impact generated by diminished growth on the financial markets. Written on 5 March 2020 Lastly, countries having decided to peg their currency to the USD had the follow the US example. Examples include multiple Middle Eastern countries such as the United Arab Emirates, Qatar and Saudi Arabia. These economies were beset with negative inflation rates throughout 2019, reflecting the relative weakness of their economic activity. The Fed’s accommodative stance will help keep key rates low in these countries, although this will not be enough to restore the level of growth that prevailed in 2000-2015. g e o p o l i t i c a l e n v i r o n m e n t , o i l p r i c e s , f o r e x m a r k e t Multiple regions showed the emergence of popular discontentment and social unrest. It is tempting to explain these movements away as the result of government inefficiency and/or uneven wealth distribution, but we were unable to demonstrate a strong link between these two factors. Although one might expect countries combining poor government efficiency with lopsided income distribution to deal with protests like these on a regular basis, this is not always the case, as in countries such as Chile. That said, this type of risk needs to be considered at the close of a year that saw the problems surrounding Brexit and the trade war relegated towards the back burner. Clearly the Middle East remained at the top of the list when it comes to political risk. This was true in 2019 and is likely to be true in 2020 as well. Geographic positioning aside, the strong population growth (averaging 2% per year) and very high percentage of unemployed young adults (generally between 20% and 30%) represent particular challenges. The region is also the centre stage of a complex set of regional and global powers keen on expanding their sphere of influence whenever multi-lateralism shows signs of weakness. The variable most directly impacted by the factors at play in the Middle East is the price of oil. Trading at $65/barrel (WTI) on average in 2018, oil averaged just $57 last year due to the steep drop in late 2018/early 2019. Truth be told, mature economies are much less sensitive to oil prices than they were during the 1970s oil shock. In the US, the percentage of direct household energy usage expenditure has dropped by half. The same cannot be said for non oil-producing emerging countries, whose economies remain highly dependent on energy prices. More generally speaking, it was the change in uncertainty over geopolitical risk that captured the markets’ attention (particularly the forex market) in 2019. In that respect, this past year saw currencies traditionally viewed as safe-haven currencies (Swiss franc, Japanese yen) pick up slightly, but the volatility of various currency pairs tended to remain low. Indosuez Wealth Management