The BID

3 themes shaping markets in 2020

Esta semana com Mike Pyle, Estrategista Chefe de Investimentos Globais da BlackRock

É o começo de uma nova década, e temos muito a esperar dos mercados. As tensões comerciais com a China persistirão? Quem ganhará as eleições nos EUA? Os mercados de ações continuarão atingindo novas altas?

Neste episódio do The Bid, Mike Pyle, Estrategista Chefe de Investimentos Globais da BlackRock, fala sobre os três temas que ele vê moldando os mercados no próximo ano, como as eleições nos EUA podem ser um obstáculo para os investidores e as resoluções dele para o ano novo.

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  • Oscar Pulido: It's 2020: a new year, a new decade, an opportunity to look back at the year that was and to look ahead at the investment opportunities that lie ahead. Will China trade tensions persist? Who will win the U.S. election? And will stock markets continue to hit new highs?

    On this episode of The Bid, we'll answer those questions with Mike Pyle, BlackRock's Global Chief Investment Strategist. We'll walk through the three themes that he sees shaping markets in the year ahead and talk about his New Year's resolutions for 2020. I'm your host, Oscar Pulido, we hope you enjoy.

    Mike, thank you so much for joining us on The Bid.

    Mike Pyle: Awesome to be here, thanks for having me Oscar.

    Oscar Pulido: So Mike, it's the year 2020, which sounds very energizing to say.

    Mike Pyle: A new decade according to some, according to some.

    Oscar Pulido: Well, it also suggests to me that we're supposed to have perfect vision of where the markets are headed. Why don't we start by reflecting on last year versus this year? What were your main takeaways from 2019 and what do you see ahead in 2020?

    Mike Pyle: Yeah. I think even getting perfect vision on the past is sometimes a challenge enough. So, 2019 was a year that was really characterized by two big drivers. First, we saw this big uptick in geopolitical risk, principally around the U.S.-China trade tensions. And secondly, this very unusual, very powerful late cycle pivot from the global central banks, most particularly the Fed, towards a much more dovish posture. And basically, those two things were in tug of war with one another through the year. At the end of the day, it looks to us as if the central banks won out. They preserved the expansion, they kept the recovery intact, and that basically drove a lot of what we saw in financial markets as well with obviously both stocks and bonds up on the year. But I think as we move into 2020, what's really noteworthy is that both of those things that really dominated in 2019, both look to be receding into the rear-view mirror in 2020. And so something is going to have to pick up the baton as we go into the new year. We think on balance, that thing is going to be growth; that even if we're not going to see a big acceleration from here, that this edging higher back towards trend for the globe, for the U.S. is really going to be enough to push global stock markets somewhat higher and cause credit and other risk assets to have a decent year as well.

    Oscar Pulido: So you mentioned geopolitical risk; you couldn't escape that in the headlines in 2019. And then you mentioned this dovish posture, this pivot, which effectively was essentially banks, particularly the Federal Reserve, cutting interest rates last year and then that helped stock and bond markets as well. If you had to sum up the outlook in a few sentences, what would you say about 2020?

    Mike Pyle: 2020 is likely to be a year where growth edges higher globally, where what leads growth globally are places like manufacturing and trade that were beaten down in 2019.

    That has two implications for portfolios. The first is that we think that against a backdrop of the expansion continuing, against a backdrop of market prices, valuations, looking basically reasonable, we think stocks and credit are likely to be modestly rewarded over the course of 2020. Secondly, we think that some of the more cyclical parts of the global market, places like Japan and emerging markets that have particular upside exposure to manufacturing and trade, we think that those have more upside than some of the more defensive parts of the market that have been rewarded in the past couple of years. So the bottom line is, we like a modest tilt into stocks and credit and within that, see some of these cyclical asset classes that again kind of have higher exposure to trade and manufacturing as having some upside that hasn't been apparent in a while.

    Oscar Pulido: You mentioned manufacturing rebounding. That sector had a very tough 2019. What is it that would cause it to have a better 2020?

    Mike Pyle: I think partly it can have a better 2020 in part because it had such a bad 2019. But more specifically, if we looked at what caused that bad year for global manufacturing, global trade in 2019, it really is attributable to a significant extent to the frictions and instability that we saw in the world's largest trade relationship between the U.S. and China. Looking out across 2020 on the back of the phase 1 trade deal that got struck, we see that relationship as going more or less sideways across the course of 2020. That should take a real pressure off of global manufacturing and trade going into 2020 in ways that could allow it to bounce back modestly but meaningfully off the lows that we are seeing here in 2019.

    Oscar Pulido: So as we go into 2020, I know that many times when BlackRock talks about the outlook, we talk about themes, and there is typically three of them as there is for 2020. So why don't you tell us a little bit about what the three themes are for this particular year?

    Mike Pyle: Absolutely. So the three things that we're talking about in terms of the big drivers of 2020 are first what we call policy pause, and that is in effect saying that the two big things we saw drive markets and economics last year, as we were just talking about, are more likely than not to recede into the background in 2020. That's true of the trade instability that we saw, not that there won't be bouts of turbulence here and there. Also central banks, we see them as well basically being on hold throughout the year and the Fed is at the top of that list. I think listening to Chairman Powell, he made it very clear that the Fed is pretty comfortable with where they are at, and the barriers to additional cuts from here are pretty high. The second big theme is if policy is not going to be driving 2020 and economics and markets, what is? And I think what we expect to see is a bit of a hand-off from policy to growth. And not that we're going to see a big runaway year of global growth, but I do think that 2019 was a year where we saw growth slow sequentially quarter over quarter on a global basis and 2020 is a year where we expect to see growth bottom and then sequentially pick up across the course of the year. And then lastly, the third theme is around rethinking resilience. At the top of the list, thinking about the way in which the world could be quite different ten, fifteen, twenty years into the future around climate and sustainability risks, making sure that portfolios are increasingly reflective of and resilient to those risks. That also means resilience in a more traditional sense: being focused on finding places for our portfolios to stand up to the different scenarios that can unfold. And one thing that we're thinking about for example is while we don't anticipate that inflation is going to move much higher from here, it's also the case where the conditions are right for there maybe to be an upside surprise. And given what inflation can do to stock bond correlations and to the balance of portfolios, we think we need to be resilient to that outcome.

    Oscar Pulido: So you mentioned a lot there, I want to go back to policy pause and growth edging higher up. It feels like a long time ago, I remember taking a few classes in economics and what we learned was that if the central bank cut interest rates, there tended to be a lagged impact on the economy. Therefore, is what the Fed did in 2019 and the reason you see growth picking up in 2020 a function of those interest rates cuts starting to make their way into the real economy and thus giving the economy a bit of that boost that it sounds like you're talking about?

    Mike Pyle: That's exactly right. I would say first we have begun to see some of that monetary stimulus flow through the economy. I think one of the places that was strongest in the U.S. economy in late 2019 was the housing sector, for example, both around activity and sales, and that is exactly where you'd expect to see monetary stimulus show up first. But I think one of the things that we're particularly taken by when we look at the data is traditionally our measure of financial conditions, usually that index moves pretty closely with changes in global growth, global activity. In 2019, we saw pretty big divergence open up between those two things, the amount of activity that was being forecast by the level of financial conditions and the actual activity that we observed in the economy. We think that divergence was really an overhang from the geopolitical and trade tensions that we saw. And as that overhang dissipates, we expect those financial conditions to flow through and allow growth to pick back up, closer to what would be forecast by these financial conditions.

    Oscar Pulido: Financial conditions is a variety of different indicators that we look at; it's not just one, for example.

    Mike Pyle: Exactly. It's basically things like interest rates, credit availability, stock market levels, the dollar, basically an amalgam of indicators that taken together suggest how available credit and a sense of wealth is within the overall economy.

    Oscar Pulido: And so we talked about the Fed having cut rates. In Europe and Japan, interest rates are already at levels that I think no one in the financial industry expected to see in their lifetime. So it doesn't feel like central banks have much more room to cut interest rates if they needed to. So what other levers do central banks have to pull if for some reason we run into some difficulties in 2020?

    Mike Pyle: Yeah. I think that what you point to is one of the reasons why we think finding resilience is increasingly hard for portfolios outside of the United States and other developed markets. The distance between the effective lower bound and where interest rates are now in Europe and Japan is, by historic standards, very, very, very low. And that means there is just a whole lot less room for interest rates to move lower, for bonds to rally in the face of a growth shock or an economic shock of some kind. And that means in Europe and Japan, bonds are just to a much lesser extent than has historically been the case providing that basic cushion and stabilization in portfolios.

    Oscar Pulido: So what you're saying is if there is an event of volatility in the markets, government bonds historically provided some diversification in your portfolio, but it's unclear how much they can provide just given the low level of interest rates that you're starting from in the first place.

    Mike Pyle: Yeah. And again, that's true in Europe and Japan; that's much, much, much less true in the United States where there is still a fair amount of cushion in terms of where interest rates are. But in Europe and Japan, I think you're exactly right. This then asks a set of questions about, okay, in the face of economic or financial risk, how would policymakers, central bankers in particular, respond? The types of tools that are going to have to be reached for in the future probably aren't just in the hands of central banks, and we really need to look to places like fiscal policy to provide an overall boost to aggregate demand that is coordinated with additional monetary policies.

    Oscar Pulido: What does fiscal policy mean? Does that just mean tax cuts or is that a broader term that could mean a number of other different actions that governments could take?

    Mike Pyle: Yeah. I think what it means is the net contribution of resources to the aggregate demand in the economy from changes in either tax policy or spending policy. I think, for example, in Europe right now, you hear a lot of talk about a big effort around investments in green infrastructure. I think there is a lot of talk about that, though a little less far along in the United States. Certainly the most recent example we've seen of a significant demand side stimulus was the tax cut bill in the United States back in 2017, but I think it's just as likely moving ahead that additional stimulus doesn't take the form of tax cuts necessarily but really does take the form of these types of investments and green energy, green infrastructure, what have you, going back to the point around climate and sustainability.

    Oscar Pulido: We are taking about fiscal policy, it turns out you worked in Washington DC in your prior life, and so you may have heard there is a presidential election this year. I don't know if you have read the headlines.

    Mike Pyle: I've been told.

    Oscar Pulido: I'm not going to ask you who you think will win, but what I would want to ask you is can you frame what the issues are that investors should think about if there is a Democratic-led White House versus a Republican-led White House?

    Mike Pyle: Yeah. So I would say that a couple of things to bear in mind are first, investing on the back of a belief about what is going to happen politically is pretty dangerous game to get into. Sometimes even on the day of elections, expectations are thwarted. And I'd say secondly, and we saw this in 2016 as well, forecasting how assets are going to move on the back of a particular outcome is also very difficult. With respect to the election itself and how that might play out for investors, I think I would make just a couple of observations. One, I do think that we think that it is going to be a headwind for U.S. risk assets in particular – stocks and credit – in 2020, largely because the range of outcomes out there is really high. We have President Trump running for reelection. I think he'll largely be running on a very similar platform to what he ran on in 2016 which for economic purposes, likely means a significant ratcheting higher of trade pressures if he were to be reelected. And on the Democratic side, I think we're seeing a set of very ambitious proposals across a number of different dimensions of economic policy, ambition at a scale that we probably haven't seen since 1960s or 1970s. One place that I would point to precisely because it's one of these few places that we're seeing some overlap between Democrats and Republicans is that it does seem as if the direction of travel on regulation of technology and large technology firms is going to move in a more meaningfully aggressive direction regardless of who is in charge. That could take the form of anti-trust or privacy or tax or a number of other things. But I do think that for this handful of large firms that have been very important drivers of U.S. equity markets, the direction of travel on regulation looks to be a lot tougher regardless of who is in Washington. But perhaps with a bit more energy on the Democratic side.

    Oscar Pulido: And on that last point, technology has become a major component of U.S. stock markets, just given how well that sector has done in recent years. So if I look at the outlook, actually the uncertainty around the election is what has caused your view to become a bit more neutral on U.S. equities in particular, U.S. stocks, and has become a little bit more favorable towards a more cyclical what I'll call assets; so things like emerging markets or things like Japan.

    Mike Pyle: Yeah. I think that is basically right. I would say our outlook for the U.S. isn't negative. We think the global equities at large are going to have a positive year in 2020. We think that U.S. equities are probably going to perform basically in line with global equities. So it's not a forecast that is going to be a bad year for U.S. stocks. But I think what it is to say is after a number of years in which we've seen the U.S. outperform versus the rest of the world, this looks to be a year where it's going to be more in line, and I think you've exactly pointed to the reasons why we think that is so.

    Oscar Pulido: You mentioned inflation earlier and this possibility of inflation moving higher. I feel like all around us, prices are going down. We get things for cheaper than we used to whether it's clothes or the way we buy media, our cable, so what do you mean by the risk of inflation moving higher? Is it that you think it'll move significantly higher or just from a relatively low base we could start to see some inflationary pressure?

    Mike Pyle: Yeah, much more the latter. I think our base case is for inflation to remain broadly subdued across 2020 and tick a little bit higher towards trend. I think that is largely a function of the fact that we really are now seeing some wage growth flow through to the economy given where labor markets are and where the cycle is. And then I'd say lastly and I think potentially most importantly, it's something that is under-emphasized in the broader market narrative is, some of the supply side dynamics around the protectionism that we've seen to date and where we think the trade war between the U.S. and China could go down the road, the unwinding of global supply chains, the decoupling between the two biggest economies in the world, that introduces some inefficiencies into the global economy that could also be reflected in the lower productivity, lower growth, but also somewhat higher inflation. So I think our view again is not that we're going to run away into a much different world but we just in the base case, we could see inflation tick back towards trend. And in a risk case, which is low probability but higher impact, we could see it go somewhat beyond that. And it's high impact precisely because any move in the inflation complex challenges the negative stock/bond correlation which is just such a cornerstone of multi-asset investing; and again, this point we were raising earlier about bonds offsetting or cushioning equity market volatility.

    Oscar Pulido: Basically if inflation did in this low probability scenario that you outline surprise to the upside, you could have a scenario where stocks and bonds are both suffering at the same time. Doesn't happen often, but certainly one of the things we would just have to think about?

    Mike Pyle: That's absolutely right, and I think the importance or takeaway for that for us is things like Treasury Inflation Protected Securities are a really nice asset class to be building an allocation to alongside nominal treasuries. Precisely because they're pretty attractively priced right now, and in a sense, they're doubly resilient. That if you see the types of growth slowdowns or geopolitical shocks that allow nominal treasuries to rally and cushion portfolios, those same shocks cause TIPS to rally, a little less so, but they still rally and provide cushion to portfolios. But with upside inflation surprises, you don't get any real resilience out of nominal Treasuries, but you do get definitionally that resilience out of TIPS.

    Oscar Pulido: Let me ask you about China because you talked about the two largest economies in the world being the U.S. and China. China has seen its growth rate actually come down over many years. What was once a 10, or 11 or 12 percent growth rate for that economy is now more in the mid single digits. Should we be concerned about that, or was that a natural progression of where that economy was headed?

    Mike Pyle: Yeah. I would say China is on a natural trajectory towards slower, but I think hopefully higher-quality growth. This is certainly the direction of travel that the Chinese leadership wants to take that economy in the direction of. And what I think that is likely to mean in 2020 is that we see stable growth out of China, a continuation of the slow deceleration trend. We won't see a big insertion of stimulus into the economy like what we saw in 2011, 2012, 2015, 2016, in an effort to really deliver a big growth surprise out of China. And that's a different place than the global economy has been versus past moments where there have been these slowdowns that we then come out of. And I think it is part of the reason why to go back to the themes, we talk about growth edging up, not growth rebounding. The fact that China is not going to be putting a lot of stimulus into the system means that the ability of the global economy to come back and move towards trend or a little higher is real, but the upside of it is capped precisely because China doesn't want to flood the system with stimulus like they have in the past.

    Oscar Pulido: So Mike, you've mentioned a number of interesting things, and if you had to sum it all together, what is the thing that you think the markets are paying too much attention to and then what's the thing that they're not paying enough attention to?

    Mike Pyle: Perhaps surprisingly given what we talked about a little bit ago, is I do think at some level there is a little bit too much focus on the U.S. election as a big risk event in 2020. Like I said, I do think that we see it as a headwind that is going to impact U.S. equity market performance across the course of the year. But I think that we're also seeing a lot of noise both in the political system and in the market commentary around just how big of an event this is likely to be. And I think in reality the U.S. economy looks quite resilient at this stage, that will ultimately flow through to the strength and resilience of the U.S. equity market. In terms of what is not hyped enough, I think that EM, emerging markets, are underdiscussed. We talk about policy being on pause; I think the one place where that is not likely to be true is around emerging market central banks, where a number of EM central banks outside of China are likely to continue cutting across the course of 2020. And I think that backdrop of central banks cutting rates plus growth edging higher on a global basis is a pretty attractive backdrop, certainly for emerging market debt but probably also for emerging market equities as well.

    Oscar Pulido: And Mike, you have an impressive background, I alluded to the fact that you worked in Washington DC.You spent some time in the White House, you came to BlackRock and earlier this year you became the Global Chief Investment Strategist. So tell us more about that role and what it entails and what your day-to-day looks like?

    Michael Pyle: At some level, my job in my old life was to get up every day and try to figure out the global economy, and my job today is to try to get up every day and figure out the global economy, which is what I enjoy doing. In the past, it was about helping advise the president and the senior team about how to chart a course of policy that would navigate through what we saw out there in the global economic environment. I find tremendous satisfaction in much the same way talking to our clients day in and day out. Whether they are individual retirees or pensions or life insurers, helping them think through how to navigate a difficult world to make the decisions for them that's going to get them where they want to go, that feels very purposeful, and so that is a really cool thing about what I get to do.

    Oscar Pulido: I hope we all get to have the same passion in our job that you have in yours. So Mike, we usually end these podcasts with a rapid fire round. Since it's the new year, we're going to talk about New Year's Resolutions. You tell me which one you think is more likely. Are you ready?

    Mike Pyle: Yeah. Bring it.

    Oscar Pulido: Okay. More likely to sign up for a gym membership or cook at home every day

    Mike Pyle: So I would say I am more likely – probably not a gym membership – but more likely a yoga membership, the coming year, would make my family very happy with me.

    Oscar Pulido: And that will give you a lot of time to have clear thoughts on the market and global economy.

    Mike Pyle: Yes.

    Oscar Pulido: Would you spend less time on your cell phone or spend less time on Netflix?

    Mike Pyle: I would in fact spend more time on Netflix and way less time on my cellphone.

    Oscar Pulido: Are you more likely to drink less coffee or less carbonated beverages?

    Mike Pyle: The fact of the matter is, I'm likely to continue consuming a lot of both, but I would say maybe hopefully a little less coffee.

    Oscar Pulido: And the last one here, are you more likely to read more books or listen to more podcasts?

    Mike Pyle: Recognizing the danger of this answer, I'm going to say that I really hope that I read more books in 2020. Twitter has destroyed my attention span, and I need to rebuild it. My hope for 2020 is that books are going to be a key part of the strategy for rebuilding my attention span.

    Oscar Pulido: All right, well we appreciate your candor, but you're no longer invited back to The Bid podcast. I'm just kidding, thanks Mike for joining us today, we look forward to see how your outlook pans out in 2020.

    Mike Pyle: Thank you for having me. Fantastic to talk.