As we approach the longest historical economic expansion in North America, we see the cycle continuing with no recession on the horizon. Twenty different global central banks eased monetary policy in 2019 providing fuel for global growth to continue. As U.S.-China trade tensions calm and a resolution to a three-year Brexit standoff is in sight, we believe business sentiment should improve and abundant central bank liquidity can help provide positive yet uneven global growth.
We’re forecasting global growth around 2% in 2020 lead by North America, offset by weakness in Europe and China. Recent economic data, led by a bottoming in global Purchasing Manager Index (PMI) readings have illustrated this potential trough in economic data with the possibility of a mini-recovery in 2020. A very healthy North American consumer will help further fuel this growth.
Despite a potential uptick in growth we see little sign of any increase in inflation which will help keep interest rates benign and range-bound in 2020. Inflation continues to be held in check by very strong cyclical and secular trends including an excess of supply, limited pricing powers, and no wage growth acceleration. This provides central banks the cover to continue their easing bias in 2020, allowing continued strong tailwinds to the fixed income market.
While we expect the Federal Reserve (Fed) to remain on hold in 2020, it’s currently buying US$60 billion per month in Treasury bills to increase bank reserves and the money supply. Other central banks, led by the European Central Bank (ECB,) will also do much of the heavy lifting for the Fed. The ECB has engaged in another round of asset purchases of 20 billion euros per month that began this past November.1
We expect the People’s Bank of China (PBOC) will continue to pump liquidity into the market to stabilize the Chinese economy and the Bank of Japan (BOJ) will maintain its accommodative stance. We also see the Bank of Canada (BOC) undertaking its first rate cut in 2020 which should pave the way for Canadian interest rates to outperform that of other developed markets. All this leads to our view that global interest rates will remain range-bound and will continue to provide an inverse correlation to risk assets in times of volatility.
The Invesco Fixed Income (IFI)† team continues to find opportunities in corporate credit, both within investment grade and high yield, with a bias towards higher quality credits. Corporate balance sheets remain relatively healthy as debt service levels remain strong and select BBB-rated companies look to further deleverage their balance sheets from recent acquisitions. While valuations are somewhat fair, a strong technical backdrop due to continued investor inflows can drive price appreciation from current levels in our view. With over US$12 trillion of negative yielding securities globally, we expect money to continue to flow into North America investment grade credit and have positioned our portfolios to take advantage of these flows with investment grade credit being the largest asset class in our funds. We also find opportunities from the best-in-class BB-rated sector of the high yield market.
Emerging markets remain an asset class between the haves and have-nots. We continue to find good opportunities in both sovereign and corporate credit in the more politically stable and fundamentally strong parts of the world, such as Central Europe, the Middle East and Indonesia. On the flip side of the coin, we continue to avoid troubled regions such as Argentina, South Africa and Turkey.
We also find good relative value in structured credit, which provides added diversification in times of stress while also helping to provide additional income generation in up markets. With the U.S. housing market remaining robust, we continue to like non-agency mortgage bonds which benefit from this strong housing dynamic and a healthy consumer.
2020 faces many global uncertainties including a U.S. election, Brexit, unrest in Hong Kong and continuing trade tensions. However, the backdrop provided by global central bank easing more thank offsets these concerns in our view helping to provide a foundation for potentially better growth, but also a strong tailwind to the fixed income market. We’ve positioned both Invesco Global Bond Fund and Invesco Canadian Core Plus Fund to potentially provide strong income generation in this environment while also being a ballast in your portfolio in times of stress.