For starters, we are living in extraordinary times, owing to the unpredictable personality of the current American president. As the 2020 US presidential election approaches, Donald Trump’s behaviour is likely to become even more erratic than it already is.
One can only begin to imagine what steps Trump will take to improve his re-election chances. Will he engage in even more sabre rattling, threatening, say, additional tariffs against China or military action against Iran? Or will he focus on keeping financial conditions accommodative in order to ward off a slowdown or recession just before the election?
There are no obvious answers to such questions. Indeed, a good friend recently told me that he is closing down his macro hedge fund because the ratio of noise to signal in the Trump era is just too high. Even if one adjusts for the frequency of Trump’s outbursts and repeated contradictions, it is impossible to predict where he will land on any given day.
Consider the following story from this summer. During the G7 summit in Biarritz, France, Trump claimed that he had received calls from China seeking a new round of negotiations to resolve the trade war. But, according to unnamed people with knowledge of the matter and quoted in the US media, this was untrue, and merely an attempt by Trump to prevent stock markets from falling. That tells us a lot about where Trump’s ultimate priorities lie. And in the meantime, China and US negotiators have announced a partial trade deal (whether it will last is anyone’s guess).
A second complication for the 2020 outlook is monetary policy. What path is the US Federal Reserve likely to take, and what will it mean for the US dollar? These two related issues tend to have a disproportionate influence on developing and emerging markets, particularly those with a lot of dollar-denominated debt.
If the Fed continues easing its monetary policy as expected, and if the dollar stops rising, emerging markets will have less to worry about. But if the Fed is forced suddenly to start tightening—for example, if inflation finally picks up —developing and emerging markets would fare poorly, as would the rest of the global economy, given the cyclical weakness that has prevailed for most of 2019.
Against this backdrop, one also must consider the underlying structural use of the dollar. Traditionally, the dollar’s role in the global economy has been conflated with its price performance against other currencies. But these are now becoming two separate issues, owing to Trump’s profligate use of the dollar as a weapon in his various foreign-policy battles. Other countries have taken note of the threat posed by America’s “exorbitant privilege," and are now looking for ways to address it.
Russia, for example, has dramatically reduced its US treasury holdings, and the Europeans have created a payment mechanism for bypassing US sanctions on Iran. Unlike many others, I have long attributed the dollar’s dominance to the reluctance of Europe (specifically Germany prior to the introduction of the euro) and China to allow their own currencies to play a bigger role in the global economy. But I would not be surprised if 2019 became the year when these players’ attitudes changed.
A third issue, of course, is China, which to my ongoing surprise is still described as an “emerging market." Given China’s ever-expanding role in most other countries’ economies, it has not fit the traditional definition of an emerging market for quite some time.
Still, I suspect that the label will persist as long as China’s per capita income lags behind that of advanced economies. China already has 4-5 times more people enjoying the same level of wealth as the average British citizen, but it also has almost a billion people who are nowhere close to that standard of living yet.
In any case, the Chinese economy is facing a big complication. In 2020, China’s real (inflation-adjusted) gross domestic product (GDP) growth will likely dip below 6% per year. This will be a major disappointment to all who have grown dependent on a growth rate closer to 7%, and it will be a marginal net drag for many others.
But that is the glass-half-empty view. For those of us who remain focused on China’s longer-term growth path, 2020 will likely be the start of a decade during which the country achieves average annual growth of around 5.5%. Indeed, Chinese policymakers cannot expect much more than that, given China’s ageing labour force.
More to the point, as long as Chinese consumers continue to contribute a growing share of overall GDP, pessimism about China’s prospects will be unwarranted. (Needless to say, significantly weaker consumption will be a cause for concern.)
A final issue for so-called emerging markets will be their equity-market valuations. As matters stand, emerging-market equities are generally inexpensive—and, by some measures, quite attractive—relative to equity and bond markets globally. If Trump decides to play nice, the Fed remains a benign influence, and China stabilizes its annual growth rate just below 6%, emerging-market equities could do rather well in 2020.
To be sure, those are major contingencies to consider, and emerging-market countries have plenty of specific challenges of their own. But I would not be too surprised if investors’ on-and-off love affair with Sub-Saharan Africa heats up again.
Several of those countries are showing signs of positive structural improvement. Investors would do well to keep an eye on them in the coming year.
Jim O’Neill was chairman of Goldman Sachs Asset Management and is a former UK treasury minister.