Investors to guard against inflation as global growth is predicted for 2020

Jodi Xu Klein

Investors should position their assets to capture the upside in global growth in 2020, BlackRock’s investment strategists are advising.

After three interest rate cuts this year, the Federal Reserve has set the stage for economic growth that could drive up inflation, which has evaded the US economy markets for years. As a result, managers at the world’s largest investment firm, which oversees about US$7 trillion in assets, are doing some allocation shuffling.

“As the global growth outlook is positively supported by global manufacturing activity, capital expenditure and improved trade policies, we’ve made a large shift into inflation-linked securities, particularly in the US,” said Bob Miller, a BlackRock managing director and head of Americas Fundamental Fixed Income.

“We don’t need to see a V-shaped growth trajectory for these [securities] to outperform. All we need is to avoid the scenario we saw in late summer where recessions fears were high.”

Inflation-linked bonds are designed to help protect US investors by connecting their principal and interest payments to a nationally recognised inflation measure such as the Consumer Price Index (CPI).

In another sign that a recession is not in the cards for 2020, Pierre Sarrau, BlackRock’s chief investment officer for multi-asset strategies, said: “If the election leads to a large market correction, it will be an opportunity for us to plunge in rather than becoming defensive.”

Such investment sentiment spells a departure from the one dominating most of 2019, when geopolitical uncertainties were front and centre in large part because of the drawn-out trade war between the US and China.

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Trade pressure that drove investments in 2019 is expected to be somewhat muted in 2020, moving sideways, BlackRock’s investment strategists said. And in the past few months, that has helped revive a risk appetite that is expected to continue into next year, they said.

Since late August, the S&P 500 index has gained 13 per cent and the Dow Jones Industrial Average is up 11 per cent.

As major economic drivers such as trade disputes and fiscal policies like interest rate cuts fade, the markets will mainly be driven by fundamentals in 2020, the strategists said. Global equity is expected to remain positive, especially in Japan and select emerging markets.

US Federal Reserve Chairman Jerome Powell speaks in Washington on December 11. The Fed cut interest rates three times in 2019. Photo: Xinhua

In fixed income, emerging markets look attractive at 4 per cent and are “a necessary part of the portfolio next year”, said Miller.

“Places like Mexico, where rates are substantially higher than others,” he suggested.

US Treasuries remain a relatively good hedge to offset any disappointment in growth.

The investment professionals, however, cautioned that next year’s US presidential election would cause market uncertainty, and they urged money managers to look for opportunities that are neutral from political outcomes.

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Agency mortgages, which are bonds issued by quasi-government entities such as Fannie Mae, are expected to outperform as they are linked more to the health of the US housing markets than to who occupies the White House.

“Another theme that has become certain when it comes to the election year is that we should expect incremental fiscal stimulus regardless of whether Trump regains the White House or Democrats win,” said Miller.

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