Analysts see no finish to bull market run

The bull market coming out of the global financial crisis looks set to extend its record-setting run in 2020 after clouds that had darkened the investment horizon in 2019 grew less threatening toward the end of the year.

With the recent upturn in global manufacturing data, a "phase-one" U.S.-China trade deal and now a strong U.K. parliamentary majority for Brexit, "there's definitely a sense that a lot of the uncertainties that have plagued markets throughout 2019 are greatly reduced," said Kerry Craig, Melbourne-based executive director and global market strategist with J.P. Morgan Asset Management.

For the most part, market veterans say that holds true, for now, even as concerns about the ongoing trade wars were superseded by fears of a real war, in the wake of the U.S. President Donald Trump, on Jan. 3, ordering the killing of a key Iranian leader, Maj. Gen. Qassem Soleimani.

Iran's government retaliated with a missile strike against U.S. military positions in Iraq that reportedly resulted in no casualties. That was followed by signs of both sides stepping back from actions that could expand the conflict.

Wouter Sturkenboom, chief investment strategist for Europe, the Middle East and Africa and Asia-Pacific regions with Northern Trust Asset Management, noted that while the move clearly adds to uncertainty, developments so far have been fairly muted.

"Escalation is not our base case ... and we currently do not see the need" to downgrade Northern Trust's forecasts for the coming year, he said.

The global economy faces considerable challenges but "recession risks have dialed down a notch or two" and the outlook is looking brighter — a supportive environment for risk assets, Mr. Craig said.

On Jan. 6, Keith Wade, London-based chief economist with Schroders PLC, lifted his 2020 market-weighted forecasts for global growth to 2.6% from 2.4% and U.S. growth to 1.8% from 1.3%, citing the U.S.-China trade truce and the boost likely over the coming year from the abrupt return to very loose monetary policy 12 months ago.

"The situation in Iran challenges our assumption that 2020 will be a year of reduced geopolitical risk (but) it looks like being relatively contained at this stage," Mr. Wade said. If escalation ensues, meanwhile, the U.S. has levers to pull to moderate the rise in oil prices and beyond that, the size of the region in economic terms is not so great so "I'm not expecting a material impact at this stage," he said.

On Jan. 9, meanwhile, Mr. Wade's team — in a study regarding what the flare-up of Middle East tensions could mean for markets — contended that investors would have enjoyed better long-term results if they had not taken risk off the table during previous periods of heightened geopolitical uncertainties such as during the Gulf War and Mr. Trump's period of nuclear brinkmanship with North Korean dictator Kim Jong Un.

Salman Ahmed, London-based chief investment strategist with Lombard Odier Investment Managers, said the odds of seeing a global recession over the coming 12 months have dropped to 20% or less from twice that level during the summer when the U.S.-China trade dispute was escalating and industrial production was dropping fast.

With that reflationary turn since September, "we started to increase our exposure" to risk assets, moving to neutral from underweight, said Thomas Poullaouec, Hong Kong-based head of multiasset solutions, Asia-Pacific, at T. Rowe Price Group Inc.

Mr. Poullaouec said his team, partly in response to the favorable developments of recent months, will tactically overweight cyclicals in the early part of this year, favoring emerging market stocks over U.S. stocks.

Still, both Messrs. Ahmed and Poullaouec said the hopeful signs they're seeing remain tentative and need to be confirmed by subsequent data.

There are no signs of "irrational exuberance," noted Mr. Ahmed, who went on to say he'll await first-quarter data for the first hints on whether progress on key geopolitical uncertainties is buoying the economy.

Mr. Poullaouec said T. Rowe still sees 2020 as a year "where the upside will not be too high and the risks more to the downside." The reacceleration of manufacturing, still in an early stage, needs confirmation that it will last "more than a couple quarters," he said.

The International Monetary Fund's World Economic Outlook, released in October, predicted only a modest rebound in global growth for the coming year to 3.4% following a 60-basis-point drop in 2019 to 3% and repeatedly termed the odds of achieving that target "precarious" — a sober assessment in line with that of many global managers.

Still, that outlook leaves asset managers predicting another decent year for risk assets, even if the spectacular gains posted by U.S. stocks and bonds in 2019 — powered by the U.S. Federal Reserve board's abrupt shift to monetary easing from tightening — can't be expected this time around.

For the latest year, the S&P 500 U.S. stock benchmark soared 31.49%, while the MSCI All Country World index jumped 26.6%. The Bloomberg Barclays U.S. Aggregate Bond index delivered a healthy 8.72%. The MSCI China A shares index, meanwhile, posted a spectacular 36.11% gain.

Against the backdrop of continued supportive central bank policy, there's no reason to take risk off the table now, said Seema Shah, London-based chief strategist with Principal Global Investors LLC. But at some point over the coming year, the disconnect between rising equity prices and modest global earnings growth will begin to unnerve investors, she predicted.

Meanwhile, with developed market sovereign bond yields already low or negative, market veterans say the need for additional support from fiscal policy will be a focus of attention in the coming year, as growth in the U.S. and China likely moderates to 2% or less and shy of 6%, respectively.

"This world needs very low rates to sustain modest growth rates," and looking ahead it can still count on ample "fiscal firepower" to slow the slowdown, said Northern Trust's Mr. Sturkenboom.

That broader policy mix could keep a recession at bay for the next five years — effectively, a "new world" of slow growth and low inflation that will allow for an elongated but flattened cycle, Mr. Sturkenboom predicted.

A key question as 2020 begins is whether vibrant U.S. consumers can pull U.S. manufacturers out of their slump, signified by contractionary Purchasing Managers index readings for much of 2019, or, conversely, whether a weakening U.S. industrial sector will ultimately undermine employment growth and the consumption powering the U.S. economy now, said William Davies, Columbia Threadneedle Investments' London-based chief investment officer, EMEA, and global head of equities.

Recent favorable news on trade could tilt that balance in favor of reflationary conditions but Columbia Threadneedle's base case remains one of muddling through, with neither an acceleration of growth or a deep recession, Mr. Davies said.

Meanwhile, the Trump administration's aggressive trade tactics, wielding the cudgel of tariff hikes to negotiate deals more favorable to the U.S., will continue to be a source of uncertainty for investors in the coming year.

The top risk facing markets today is still politics, JPMAM's Mr. Craig said, noting that tariff hikes will remain an ever-present possibility as negotiations between the world's two biggest economies stretch on, and other potential flare-ups with Europe over products ranging from French wines to German cars remain to be addressed.

On that score, most observers see December's apparent progress on the U.S.-China trade front as a temporary lull in a protracted struggle rather than something business executives can bank on continuing. On balance, analysts aren't predicting the kind of rebound in capital expenditures that could add a second cylinder, alongside consumption, for global growth.

Some pickup in capital spending is likely but with continued uncertainty around the political environment, "you're not necessarily going to see companies go all in when it comes to investment," Mr. Craig predicted. Meanwhile, rising wages in a decelerating economy will leave corporate margins under pressure, he said.

Along the same lines, a number of analysts cited inequality and civil unrest — marked by the populist uprisings that have erupted in countries around the world in 2019 — as a potential source of disruption for governments and investors alike in 2020.

"Globalization is flatlining" now, with too many people feeling left behind and politicians not doing an effective job thus far in responding, said Northern Trust's Mr. Sturkenboom. Future growth could be more domestic as a result, he said.

Still, the biggest political risks next year could revolve around the U.S. presidential election set for Nov. 3, said Lombard Odier's Mr. Ahmed.

For example, if Massachusetts Sen. Elizabeth Warren, a candidate who has issued detailed plans to reorder key economic sectors such as finance and technology, should emerge as the front-runner in February or March as primary voting accelerates, the U.S. equity market could experience a "Warren shock," he said.

"At the moment, we are pro-risk but we have an underweight on U.S. equities" for that reason, he said.

Meanwhile, if most analysts expect continued extraordinary policy support in pursuit of adequate — as opposed to vibrant — growth, some observers nonetheless warn that the risk of stronger than anticipated growth is worth considering and preparing for.

Investors are underestimating the scope for good news — such as the looming U.S. presidential election providing incentives for the Trump administration to ink a more comprehensive trade pact with China — to create a "virtuous spiral," buoying confidence, feeding through to economic indicators and steepening the U.S. yield curve, said Philip Lawlor, London-based managing director, global markets research, with FTSE Russell.

"Quite a bit of the bad news had been baked in by the market but it's the perpetuation of financial repression that's driven this risk appetite and that's where the biggest risk will reside if that were to get taken away," Mr. Lawlor said.

Investors could be ignoring the long-dormant risks of inflation just as pressures may be set to emerge in 2020, agreed Steve Ellis, Fidelity International's London-based global chief investment officer, fixed income, in a Dec. 13 presentation in Singapore. He said Treasury inflation-protected securities, trading now at attractive valuations, are something asset owners should consider adding to their portfolios.

BlackRock Investment Institute's tactical asset allocation framework is overweight TIPS now as a prudent hedge to ensure portfolio resilience, said Ben Powell, Singapore-based managing director and chief investment strategist, Asia-Pacific, in an email. "A return of troublesome inflation is not our call for 2020 (but) so much of modern market dynamic is predicated on low interest rates that we think it makes sense to worry excessively about any potential return of inflation."