Imogen Bachra, CFA European Rates Strategy, NatWest Markets shares five key insights from our latest Investor Survey.
3 minute read
NatWest Markets launched its Investor Survey in mid-October 2019, asking clients to share their thoughts on themes relating to global growth, the roles that monetary and/or fiscal policy will play in supporting economies in 2020, US/China trade relations during a Presidential election year and, of course, what this means for fixed income and currency markets.
Based on a record number of responses from a broad range of institutions, here we highlight the five key themes that have emerged, plus how they compare with NatWest Markets’ own view.
1. Pessimism about global growth is rife
Investors expect a significant slowdown in economic output across Europe, the US and China during 2020. For the US and China, the survey consensus does not differ substantially from our forecasts. We expect Chinese growth to be 5.8% and US growth to be 1.6% in 2020.
While some pessimism about growth next year is warranted, we think survey expectations are too severe for Europe. The survey responses predict a mean estimate of euro area growth in 2020 of 0.56%. For context, since 1992 the euro area has only grown slower than 0.6% year-on-year on five separate occasions. We expect growth in Europe over 2020 to be nearly double that of the survey’s consensus at 1.0%.
2. But there is optimism about global politics
Geopolitical and domestic political developments are key factors in determining growth expectations. Together, a Brexit conclusion and US/China trade form the majority of respondents’ focus and among currency investors, politics is viewed as the key driver of G10 foreign exchange markets in 2020.
Investors are sceptical that 2020 will bring a meaningful change in US/China trade relations, but the survey respondents show a shift towards a better, rather than worse outcome. There is also a clear consensus that President Donald Trump will win the next presidential election. But we are less certain, with much hinging on the outcome of the Democrat leadership race.
In the UK, investors were more optimistic about a ‘softer’ Brexit outcome than we are, with 34% of respondents expecting a version of a ‘Norway+’ style deal. We continue to think that negotiations will ultimately yield a harder Brexit economic settlement, more in line with Canada’s arrangements than a Norway+ deal. That said, the risks of a World Trade Organisation (WTO) agreement are still low.
 G10 countries are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the US.
3. Central banks are largely out of ammunition, but fiscal policy may help
Pessimism about the prospects of economic growth is coupled with little optimism about the available policy response. Only 17% of survey respondents think that monetary policy in major nations would be able to further stimulate economies, although this view is not shared of the US.
We expect the divergence between monetary and fiscal policy in the US and Europe to grow in 2020. Significantly, respondents think that fiscal policy could, and should, do more in Europe; some 83% of clients agree that monetary policy would not be adequate to help the euro area grow, but only 18% expect that fiscal policy will come to the rescue.
Given these concerns, investors think safe-haven assets such as gold will outperform in 2020. In the fixed income market, respondents prefer government debt issued by countries where monetary policy could be effective in a downturn (especially US Treasuries).
4. Investors don’t expect a significant correction in euro bond yields
2019 was a record year for German government bonds (bunds). Yields of 10-year bunds hit new lows of -0.7% in August, and have risen to around -0.2% at the start of 2020. Against this backdrop, however, the survey consensus predicts little-to-no change in yields, expecting a level of around -0.3% in 10-year bunds throughout 2020.
We are much less optimistic about the prospect for yields than the survey respondents. For the most part, this is due to our confidence in the European Union’s economy. We anticipate that fiscal policy should mitigate the downside risk and expect that bund prices will fall and yields rise (to positive) in early 2020. Only 13% of survey respondents agree with us.
We are also more confident in the outlook for Italy and Italian government bonds than is the survey consensus. This is largely due to our expectations for the Italian political environment, which we anticipate will calm in 2020 and see new elections avoided.
5. There is little optimism for emerging market currencies
In general, respondents prefer safe-haven currencies (including sterling) over those from emerging markets. Indeed, when asked to choose a favourite high-yielding emerging market currency, the third most popular answer among respondents was ‘none’.
We are more optimistic than this for the near term, and expect that a re-think of the US dollar and asset allocation at the start of 2020 will help boost emerging market currencies. But we are more sceptical beyond the first quarter , when we expect that emerging market rates may be affected by central banks reducing interest rates, as well as other factors.