2020 Market Outlook: Expect Higher Volatility

Summary Thoughts

  • Investors should expect more subdued portfolio returns in 2020 given high valuations across multiple asset classes
  • Expect increased volatility given U.S Presidential election uncertainty
  • Emerging market equities should outperform in 2020 anchored by China
  • Australian equities should continue to underperform international peers

Market Outlook

At face level, it’s easy to start 2020 with a sense of optimism.

After 18-months of wrangling, ‘phase one’ of the U.S/China trade deal has been signed, Chinese economic data seems to be stabilizing and major central banks in the U.S and Europe are back expanding the monetary base at a rapid rate of knots.

In the U.S, housing market activity is back to its best rate since 2007.

As President Trump often touts, employment is as strong as it’s been since the late 1960’s with the unemployment rate at 3.5% and wages growing a smidge under 3% annually.

Unsurprisingly, U.S Consumer Confidence remains within a whisker of its record high.

Providing buoyancy to the U.S economy and asset markets is the U.S Federal Reserve who in 2019 performed a spectacular reversal in policy, cutting interest rates 3x and more impressively, injected a staggering US$400bn into the U.S bond market within a matter of 4 months.

In China, the economy seems to be stabilizing after what was a tricky year for exporters burdened by tariff pressure.

Small business confidence is improving (see below), manufacturing sentiment is again positive and we feel confident that Chinese authorities will do everything in their power to ensure a strong and vibrant economy (and sharemarket) for the heavily anticipated 100 year anniversary of the founding of the Chinese Communist Party in 2021.

Standard Chartered China SME Confidence Index – Bloomberg

Contrast this upbeat mood now with how we started 2019 and the change in mood couldn’t be more pronounced.

In early 2019 investors were fearful of rising real interest rates.

Global liquidity was being drained as part of the Federal Reserve’s planned ‘Quantitative Tightening’, and the uncertainty over tariffs and global trade foreshadowed what ended in industrial recession by late 2019.

Surely as much about why markets had such a strong 2019 was as much to do with the ingrained pessimism with which we started the year.

But looking into 2020 investors should be asking, ‘are we still travelling, or have we already arrived?’

In knowing where we’re going, it helps to know where we’ve been, and with that in mind its worth acknowledging the following few facts –

  • the 2019 ASX200 Accumulation return of +23.4% was the best in a decade
  • The Australian bond index benchmark returned a generous +7.8% despite the RBA Cash rate starting the year at an already miserly 1.5%
  • The ASX200 and S&P500 now sit on their highest forward equity valuations since the tech-boom 20 years ago
  • Australian nominal and real interest rates sit at record lows

Undeniably, we start 2020 from a higher vantage point and with higher stakes at risk.

The risk/reward available to investors from traditional listed assets is far less attractive than it has been in some time and, importantly, investment outcomes remain highly dependent upon the continued monetary benevolence of central banks such as the Fed and ECB.

U.S. Election uncertainty a likely theme

Whilst optimistic that China is bottoming, it’s difficult to get more excited about the United States economy.

Afterall, economic stimulus has been prodigious via the Federal Reserve and through the Trump tax cuts, and because of that, employment, residential house construction and consumer confidence already stand at multi-decade highs.

But this comes with a cost.

The U.S budget deficit will approach 5% of GDP in 2020 – a level seen only 3x in the last 50 years and always at the depth of recession (see chart below).

US Treasury Federal Budget Deficit to Nominal GDP – Bloomberg

U.S government net debt to GDP is on track to reach 100% by the middle of this decade having been ~60% in 2010.

The Trump economy is fast looking like one of his businesses.

Arguably of greater concern should be the uncertainty felt by small businesses in the lead up to the U.S Presidential Election in November, and the massive gap between currently low-touch policies of Trump’s presidency and the bigger government favoured by left-leaning Democrat candidates such as Bernie Sanders and Elizabeth Warren.

As an American business, would you be committing to further capital investment in your business if you knew minimum wages would double under a new Presidency?

As an investor, presumably you would be concerned by the prospect of increased regulation across all manner of industries, but notably healthcare, banking and ‘the internet’ under a Sanders or Warren Presidency?

We think this uncertainty will make it difficult for investors to expect another strong year of equity returns in the U.S without feeling sure that President Trump will win another 4-year term.

Australia’s economy spluttering

In Australia, we face problems of our own.

Where we had endeavoured to hope that rebounding house prices would provide a cushion to household consumption in 2020, we now feel like the summer bushfire crisis has cancelled out much of that hope.

Tourism and agriculture are the sectors most obviously impacted, but the literal and metaphoric pall cast by the bushfires over our country will likely have a deeper and wider impact on Australia’s already fragile consumer economy.

Australia’s consumer confidence ended 2019 just off of a 4-year low (see below) despite record low interest rates, a rebounding housing market and with confidence restored amongst the superannuant-class that franking credits would remain a source of retirement income.

Westpac-Melbourne Institute Consumer Confidence Index – Bloomberg

Business confidence is worse and is at 6-year low and, concerningly for consumption, Australian job advertisement volumes are down -19% year on year and at their lowest absolute number since early 2016.

Though we feel the economy is in dire need of fresh stimulus, it seems likely that the Federal Government will wait until the May Budget announcement before offering up new infrastructure investment or personal tax relief.

We fear 2020 is at risk of being lost to local policy intransigence.

We hope not, but with equity valuations at 20-year highs and corporate earnings under pressure, having already gone backwards in 2019, it feels responsible to be cautious.

See the chart below to witness the divergence between Australian share prices and underlying earnings per share.


Expectation management

2019 was a red-letter year for asset prices with share-markets globally up +20-30% and Australian bond indices rallying an almost equally mind-boggling +7%+.

Balanced portfolio returns were impressive in 2019 and landed in the +12-20% camp, well ahead of the typical ~7% type annual return generated over the previous 20 years.

With the rally, we now start the year with equity valuations at a 20-year high, and government bond yields offering a mix of annual coupons from -1% to +2.5%.

Mathematically, it becomes very difficult to envisage a scenario in which balanced investors achieve a sustained return much beyond 5% unless the underlying economy improves and with it do corporate earnings.

Portfolio highlights

Though we feel reason to commence the year with some caution, we still feel confident in the risk/reward offered to us by a number of investments.

Within the international equity portfolio we believe emerging market equities should outperform, buoyed by a stabilization in China and the prospect of ongoing policy support in the lead up to next year’s Chinese Communist Party 100-year anniversary.

Emerging market equities start 2020 on a multiple of 13x which sits well within their historical range and compares favourably to the high multiples on which U.S and Australian equities trade.

We continue to favour the attractive returns available in domestic property-backed debt made possible by the continued retreat from this lending by major Australian banks.

Asset backed returns of 5% to 8% should be seen as attractive by investors.

Property equity with strong tenant expiry profiles and in sound locations remain deserving for investors seeking consistent mid-high single digit income.


We expect to see a more volatile year in 2020 and aim to have the cash on hand at appropriate times with which to profit from.

As in any year there are multiple variables that could influence or upset our base case, which is for a likely modest single-digit return year.

However, we think investors will do well to observe the U.S Presidential Election campaign and upcoming Federal Reserve policy in relation to recent liquidity injections.

Any sign the U.S Federal Reserve intend to create more permanence with their recent monetary injections and asset markets globally could again temporarily surprise on the upside.

For those of you seeking greater detail on investments please contact your advisor directly.

On behalf of myself and my colleagues on the PRIME Investment Committee – Mark Johnson, Cameron Morcher and Guy Silbert – I wish you every success in 2020.

Best Regards,

Jon Bayes

Watch video

Jonathan also discusses what the investment market for 2020 looks like, with Simon Madder (CEO & MD, Prime Financial). If you would like to watch their conversation, clickhere.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.


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