World investors are so buoyed by a turnaround in events leading into 2020 that financial markets are looking set to notch up their best returns in a decade. However, is such optimism justified given that there are so many unpredictable variables that will determine 2020’s economic outcome?

Much of what lies ahead calls for the adoption of a wait-and-see approach. There are three material events that will predominate: the progress of Brexit, US-China trade relations and the US elections.

The power of these seismic events to move markets and significantly alter the trajectory of financial markets and the global economy was clearly evident in 2019. With these events far from reaching their end games and so much good news priced in, asset class valuations and sentiment are even more vulnerable than in 2019 to any setbacks.

Thankfully, the global economy is heading into 2020 with global growth propped up by a resilient consumer and on a less precarious footing than it was in the third quarter of 2019. At that stage, recession was considered imminent. However, the consumer has managed to remain resilient notwithstanding the damage the US-China trade tensions did to economic momentum, capital investment and business and investor sentiment.

On this basis, many economists are reasonably optimistic about the global economy’s ability to gain fresh ground, helped by the monetary accommodation that was put in place during 2019 and the easing in trade tensions late in the day.

The US goes into 2020 on a relatively firm footing too, with consumers still resilient and likely to remain so now that 15 December tariffs on Chinese consumer goods were so narrowly averted. The manufacturing sector remains under pressure, but not in deep doldrums. Economists are expecting the US to maintain steady, although slowing, growth during 2020. Morgan Stanley, in its 2020 Global Strategy Outlook, says the US economy “continues to sit on stable ground, but its pace of growth may slow down”.

The bank outlines its base-case US growth outlook as one in which US GDP grows 1.8% from quarter one 2019 to quarter one in 2020, versus an estimated 2.3% in 2019. Morgan Stanley chief US economist Ellen Zentner characterises the US as “distinctly in the late-cycle phase of recovery.”

But with US-China trade negotiations set to continue during 2020, the unpredictable nature of talks between Trump and Chinese leaders is likely to remain a rolling risk factor that will need to be navigated carefully, given the costly spillover any setback could have on trade flows and the global economy.

Emerging markets could be in for a better year, barring any setbacks. Morgan Stanley notes that while trade tensions and tariffs made 2019 difficult for many emerging markets, “a better ex-US global growth outlook may change that narrative”.

For 2020, the bank’s economic team has raised its recommended exposure to emerging market equities from underweight to equal weight.

“EM equities typically perform better during periods of global economic re-acceleration and US dollar weakness. As a result, our earnings forecasts suggest growth of 12% for EM in 2020.” BM