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opinion

Candice Bangsund is vice-president and portfolio manager, global asset allocation, Fiera Capital

Over the past year, unnerved investors digested a flurry of trade-related and geopolitical headlines that sparked fears of a pronounced global slowdown. However, investors finally have reason to breathe a sigh of relief – particularly as two major sources of policy-related uncertainty receded substantially in mid-December. Most noteworthy is that the United States and China managed to agree on the details of a Phase 1 trade accord that averted a fresh onslaught of tariffs and even modestly rolled back some existing duties. Across the Atlantic, the likelihood of a disorderly Brexit scenario has declined after Prime Minister Boris Johnson secured a solid Conservative majority in the general elections, which has paved the way for a smooth exit in 2020.

The good news is that these headwinds that plagued growth and sentiment through 2019 have now translated into tailwinds as we head into the new year.

Indeed, it appears that we are past the point of peak pessimism on the state of the global economy, with some nascent signs that the worst may finally be behind us. The consumer has been a pivotal source of strength, improving manufacturing results out of the U.S. Meanwhile, Europe and China validated our expectations for a re-acceleration in global growth after several months of trade-induced turmoil that’s battered the factory space. Furthermore, the ceasefire in the U.S.-China trade war and the partial rollback of existing tariffs suggests further damage to the global economy will be limited from here.

With geopolitical angst now predominately in the rear-view mirror, the lagged impact of growth-enhancing efforts from both central banks and governments should ultimately prove successful in revitalizing the global economy in 2020. We anticipate positive implications for stocks, commodities such as gold and other risky asset classes at the expense of bonds and the U.S. dollar.

Where to from here?

To no one’s surprise, questions have emerged as to where the value presides after such a powerful rally in both stocks and bonds in 2019. As the favourable outcomes on the policy front are all but priced in at these record-high stock-market levels, the critical question then becomes, where to from here?

Equity markets look particularly compelling in this environment and should continue grinding higher in 2020. Importantly, abundant sources of central bank liquidity will help to nurture the recovery and extend the duration of the record-long expansion, which should ultimately increase what investors are willing to pay for equities. Meanwhile, earnings are likely to play a more meaningful role and momentum should improve on the back of a reinvigorated global growth backdrop. With so much gloom on the state of the economy, the bar is low for upside surprises to earnings forecasts and accordingly, equity prices.

And while equity markets are indeed trading at record highs, valuations are not extended by historical standards, especially given the low, and in some cases, negative, interest-rate environment that warrants above-average valuations.

Finally, with on-edge investors spending most of 2019 positioning defensively and piling into cash and bonds, equity positioning remains generally light. As such, there’s plenty of dry powder prime for redeployment back into the equity space should investors embrace that the worst is indeed behind us.

In contrast, there’s little in the way of value in government bonds at this time. The rejuvenated growth backdrop that fuels a modest revival in inflation expectations is likely to place upward pressure on longer-term rates and a corresponding downward move in prices. That being said, the backup will be fairly modest by historical standards and will not destabilize economic or financial conditions, owing to the accommodative central bank impetus that anchors shorter-term rates.

What’s more, bond investors have largely exaggerated economic softness in 2019 and bond bulls could find themselves in a vulnerable position as macroeconomic tensions subside. Increased clarity on the global backdrop may spark an exodus out of bonds that are overvalued, overbought and overcrowded, with the unwind accentuating the upward move in bond yields.

Taken together, the reflationary environment of improving growth prospects, supportive central bank policies and receding geopolitical risks bolster the case for another year of equity outperformance in 2020.

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