Dover: Recession is unlikely


  • Business
  • Wednesday, 11 Dec 2019

Dover: This low interest-rate environment is a crucial factor supporting risky assets like equities.

KUALA LUMPUR: A recession in 2020 is unlikely, and investors need not be anxious about global equity markets next year, even as markets have staged a strong advance throughout 2019 and economic data has softened, according to Franklin Templeton executive vice- president and head of equities Stephen Dover.

On the valuation front, global equity valuations appear reasonable. Major global equity markets are currently trading below their long-term average forward price earnings ratios, with the exception of the United States, which is trading at a slight premium.

Dover told StarBiz that global equity investors spent much of 2019 worried that the equity bull market would come to an end.

Money market deposits hit all-time highs during the year. Despite that, the bull market continued nearly unabated.

This was even with investors pulling a significant amount of money out of global equities on fears about the economic outlook and unresolved political issues.

“While many investors remain anxious, we see ample reason for people to remain invested in global equities in 2020, ” said Dover.

For one, he said that the global economy remains fundamentally sound.

“Although the expansion has been one of the longest on record, age alone does not lead to contraction. Economic data in late 2019 showed a softening in the manufacturing sector, which is partly tied to trade issues.

“However, the global economy has changed and is now much more based on services, even in emerging markets, than on manufacturing, and this makes the economy more stable, ” explained Dover.

Thus, even while manufacturing has hit a rough stretch, the consumer (especially in the United States) has proven to be much more resilient.

As a result, the US economy is slowing but not likely to fall into a recession, while China growth is also moderating with the eurozone continuing to expand, although modestly, according to Dover.

Taken together, growth is slowing, but Dover does not see an economic downturn.

On the other hand, there are some risks stemming from populist politics and the significant amounts of debt sitting on corporate balance sheets.

Nonetheless in broad terms, interest rates are low and there are only limited signs of inflation.

Several major global central banks have taken steps in 2019 to support growth over the coming year, and Dover expected the banks to take further steps at any sign of recession.

“This low interest-rate environment is a crucial factor supporting risky assets like equities. We believe the potential for rates to continue to stay low, or fall further, over the course of 2020 should create a constructive environment for equity markets.

“Lower interest rates would continue to force investors to seek out yield, and we believe equities are one of the more attractive options for that, ” he said.

In late 2019, global equities represented by the MSCI All Country World Index provided a 2.5% dividend yield, which should be appealing when a large part of the world’s debt has a negative interest rate.

According to data from the International Monetary Fund’s October 2019 Global Financial Stability Report, more than 30% of the debt in advanced economies has a negative interest rate, while half is between 1% and 2%.

Thus, that would seem to make the 2.5% yield of global equities even more appealing.

Dover expected upside potential in equities in international developed markets and emerging markets.

However, he believed emerging markets are more appealing than developed markets, as the economic growth differential between the two widens in favour of emerging markets.

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