We think the global economy will continue to slow next year. Market performance will depend largely on political choices, including US-China trade and elections in the US, and on fiscal policy. But investors can reassert some control by seeking investments less sensitive to politics. For example, within equities, we recommend quality and dividends, and choosing domestic and consumer-focused companies over those exposed to trade and business spending.
The UK election has given Prime Minister Boris Johnson a clear majority and the authority he needs to push through the country's exit from the EU on 31 January, driving GBPUSD briefly above 1.35. Focus has shifted to negotiating a free trade deal with the EU by the end of 2020, which is likely to keep GBPUSD in a 1.30-1.40 range until June. Sterling remains undervalued and progress toward a benign trade deal with the EU could see GBPUSD rallying to 1.45 by end-2020. We recommend not currency hedging UK equities in USD portfolios.
National elections tend not to affect global investors substantially. But the US presidential vote is an exception to that rule, given the nation's economic and financial heft. Crucial economic and industrial policies are at stake in the upcoming November 2020 elections in the US, with a wide divergence between 14 Democratic nominees and incumbent President Donald Trump. We advise against positioning for a particular outcome, and instead suggest bracing for higher volatility as the vote approaches, especially in sectors such as technology, energy, and healthcare, which could be affected by election uncertainty.
After an extended period of tit-for-tat tariffs, the US and China have agreed on a partial Phase 1 trade deal. The White House says it will roll back some tariffs and suspend a new round of levies, while China will make significant US agricultural purchases and address other irritants. We maintain a risk-on stance in our portfolios, including an overweight in emerging market (EM) equities.
Gold prices have rallied strongly on geopolitical tensions, trading above USD 1,600/oz on 8 January for the first time since 2013. Prices could rise further in the near term if military strikes escalate; otherwise safe-haven demand could fade. However, fundamentals are supportive. Muted economic growth and low real rates reduce the opportunity cost of holding gold. We also expect the US dollar to weaken in 2020, which should support gold prices.
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