Global Becomes Local, Thoughts On 2020 From BoA Merrill Lynch

Jackie Bennion

19 December 2019

Bank of America Merrill Lynch shares its 2020 market outlook: In brief the bank forecasts profits rising, economies slowing, globalization peaking, and business-as-usual investing coming to an end. Analysts there see a bottoming of economic growth in the spring as trade war tensions ease, and relatively low recession risk.

Highlights from its global research team:
• Stocks are expected to outperform bonds handily in 2020 as the global economy bottoms out in the first quarter, while monetary policy remains accommodative. The conventional idea of allocating 60 per cent to equities and 40 per cent to bonds is unlikely to survive into the 2020s.

• An interim, skinny US-China trade deal should temporarily relieve trade concerns ahead of the US presidential election and pave the way for a mid-year, mini-boost in global growth led by US rates and a weaker dollar.

• A rebound in US corporate earnings should spur a long-awaited uptick in capital spending and lift the S&P 500 to another year-end high of 3300, or 6 per cent above current levels. In a reversal of trend, US stock returns are expected to lag gains forecast for Europe and emerging market stocks next year.

• The potential for 6 per cent total returns on high-grade bonds next year makes US corporate credit particularly attractive in a world facing $12 trillion of negative-yielding debt. Inflows from foreign investors are expected to remain strong, supported by favorable spreads, but today’s bond market “bubble” could become the markets’ biggest vulnerability.

“The new year and decade begin near the tail end of the longest bull market on record, and despite recent strong gains, investor anxiety remains at a high level,” said Candace Browning, head of BofA Merrill Lynch Global Research. “Many of the driving factors – central bank policy, globalization, oil – have peaked, and new economic paradigms are emerging in response to a different set of challenges facing the world’s social, environment, political and economic systems. Rather than focusing on the downside, we think the opportunity for investors will be found in what happens next," she said.

When BoA Merrill Lynch strategists and economists met in New York last week to share 2020 outlooks and investment themes that are transforming economies, the most notable theme was stronger local and regional economic ties being forged. This is a departure "from three decades of economic growth fueled by the benefits of globalization" the bank said, defined by "an unchecked, cross-border free flow of goods, people and capital that rewarded cheap labor and low consumer prices." This shift from global to local and other global macro trends underscores much of Merrill’s outlook on the markets and economy for next year.