The safest thing to forecast at the beginning of the 2020s is more of the same. People and companies may well have made all sorts of good resolutions about how they will change this January, but in practice the new year is born within the policy constraints and decisions of the old.
Last year saw muddle through and global slowdown. The US ended the year with a monetary boost to add to its longer running fiscal stimulus of lower taxes and higher spending. The euro area saw the resumption of quantitative easing after a period of trying monetary restraint alongside budget prudence. The Chinese edged towards some monetary relaxation, though they are still fighting weak banks and bad debts in their system.
The UK, with tight money and a low budget deficit, seemed to have a very cheap currency, so where I could I added to the hedged exchange traded funds (ETFs) in the global fund for overseas holdings. I switched the large holding in Nasdaq into a currency protected version at $1.22 to the pound. I also added to the holding in the FTSE 250, as UK assets generally looked good value.
The new year does, however, bring with it the prospects of events and trends that could change the investment landscape. In the US, 2020 will be dominated by news from the presidential election.
The long and tough Democratic party campaign to find a challenger to Donald Trump, the US president, has so far produced three candidates equally poised to win in Iowa and New Hampshire, where the contests kick off in February. The moderates have a majority of the votes when you add up the polls for Joe Biden, Pete Buttigieg and Michael Bloomberg, but they face a tough challenge from either Bernie Sanders or Elizabeth Warren from the left.
It seems possible that Mr Trump will benefit from the arguments within the Democratic camp, as he battles to see off the impeachment move the Democrats are pressing on a Republican controlled Senate. The one safe conclusion is that this year Mr Trump will do all in his power to stimulate the economy, promote faster growth and claim credit for anything that looks good economically. The support of both the Fed and the administration for more growth is a positive for the markets.
The strength and depth of US technology is also a continuing support. Share values are much higher now after a stellar performance last year. This should be a year of further revenue and profit growth to justify some part of these higher ratings. So far so bullish.
It is also the year of decision on how to combat climate change. The long run-up to the Glasgow summit in November is important. Will the Europeans and their allies press ahead with tougher binding targets on carbon dioxide reduction without the US, India and China joining in? Will there be some compromise to claim that India and China are doing their bit to remove coal and cut hydrocarbon use? As the EU advances with its own green deal, what kind of inroads will it make into the profitable business models of traditional carmakers, airlines, oil companies, sea freight and the rest?
Investors in 2020 are likely to talk more actively about reflecting environmental, social and governance (ESG) issues in their portfolios. This implies that sectors such as technology will benefit, while those such as industrial, coal and mineral extraction and oil will suffer some discount as funds screen out certain types of share and sentiment turns against them in some portfolios.
The 2010s was the US decade. Emerging market economies as a whole struggled compared with the years before the 2008-10 crisis. Some have failed to maintain sufficient financial and political discipline and have fallen badly, such as Venezuela and Argentina.
China has slowed compared with its heady double-figure growth days. As the next decade dawns it is difficult to be so optimistic about China. There are obvious signs of slowdown in reform, with the state fighting to control Hong Kong against a strong democracy movement, and under fire from the US over civil liberties and trade issues more generally. It is likely a cyber curtain will descend, with a China-led system in the east and a US-led system in the west.
Chinese technology and service companies may well grow quickly with good revenue growth, but there will be a discount on shares all the time there are barriers to foreign ownership and to fully transparent governance of companies.
The fund has taken profits on its individual Chinese index funds, though there is still a small exposure through the general emerging market ETF. Other emerging share and bond markets have suffered from a strong US dollar and slower overall economic growth.
The 2020s will start with some retreat from globalism economically. There will be more tariffs on US trade. Mr Trump likes to deploy tariffs as negotiating devices to try to force better trade terms for the US.
There will continue to be insurgent political movements demanding more powers to nations or to the creation of new nations by splitting up larger ones. These movements will force some retreat from internationalism by the countries affected.
The decade will see the transformation of the car industry under the pressures of the green revolution, further moves online away from the high street, continuing change in media and communications and the wider application of robotics and artificial intelligence. The fund is designed to capture some of the benefits of these long-term trends.
What could change my mind? Any resurgence of inflation, or moves by central banks and governments to rein in money and activity would be very damaging to the high values of assets we see today — which would lead me to hold less in shares.
Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. [email protected]
