Outlook 2020: will fiscal policy be a game changer for markets?

Trade tensions, the continued overhang of a no-deal Brexit, and social unrest exacerbated by growing wealth inequality and ongoing climate uncertainty – the challenges facing the global economy became even more pronounced in 2019. These conditions have all helped to reduce investor risk appetite. Although there are growing expectations of a looming recession, 2020 could be a positive tipping point for higher-risk assets. Looser fiscal policy on a global basis will be key to spurring a turnaround, according to NN Investment Partners (NN IP).

Valentijn van Nieuwenhuijzen
“As we head into 2020, the global economy is approaching a fork in the road,” said Valentijn van Nieuwenhuijzen, Chief Investment Officer at NN IP. “In one direction, the headwinds of political uncertainty continue to buffet financial markets, and excessive reliance on monetary policy pushes down yields and inflation expectations as we remain mired in secular stagnation. In the other direction, we still see hope for a recovery if fiscal policymakers implement stimulus measures to increase business and consumer confidence.”

With limited monetary ammunition remaining for policymakers, further support will have to come either from a reduction in political risks or from government action in the form of fiscal stimulus or carefully crafted structural reform, according to Van Nieuwenhuijzen. A reduction in political risks could take the form of an initial US-China trade deal or an orderly Brexit, while any fiscal stimulus should be aimed at raising private productivity and fostering competition. Without such measures, there is a material risk that a large negative shift in private-sector beliefs will create its own reality in the form of a full-blown recession.

“The latest political developments, coupled with some stabilization in economic data, suggest the probability of the more positive scenario has risen somewhat,” he said. “It remains to be seen whether this will last, but if it does, it will offer room for a recovery in business confidence and capex spending.”

Fixed income

Technical indicators and fundamentals still look attractive for credit markets, both investment grade and high yield. The European Central Bank’s buying program in investment grade credit is providing support for the asset class while the easing bias of central banks is improving the technical outlook. Institutional fund inflows are positive and will likely increase.

Strong anchors are in place for fixed income spread markets. Despite the volatility stemming from geopolitical tensions, flows to spread markets should continue in a search-for-yield environment and the aggregate credit outlook of companies in the high yield universe is likely to stabilise. Within high yield, NN IP prefers the liquid bonds of larger companies, as there have been too many instances of insufficient compensation for liquidity risk in smaller issues.

Edith Siermann

“Events that may impact the macroeconomic environment in 2020 include the US presidential elections, a change of guard at the ECB, a possible Brexit and continued tariff disputes,” said Edith Siermann, Head of Fixed Income & Responsible Investing at NN IP. “Although these events are likely to elevate volatility in financial markets, spread markets in general remain attractive as risk appetite will probably remain supported by global liquidity. Meanwhile, risks to global growth could be mitigated by the prospect of global fiscal easing.”

Going into 2020, ESG demand and opportunities will continue to evolve. One example of impressive growth is the green bond market, which is set to perform well in 2020, given the prospect of continued structural support in terms of client demand and market growth. NN IP expects green bond issuance to rise from an estimated global market volume of EUR 500 billion at the start of 2020 to EUR 700 billion by end-2020 on the back of growing investments in innovation, clean energy and smart cities. This growth will be led by sovereigns, as Germany, Italy and Sweden have all confirmed they will launch green bond programs in 2020. In addition, more and more companies are entering the green bond market.

“The green bond market has gone from strength to strength in recent years, bolstering our conviction that fixed income investors can benefit just as much from investing responsibly as equity investors,” added Siermann. “The impressive market growth offers many opportunities to benefit from new issue premia. In addition, investing in green bonds is a way to select issuers that are innovative, forward-looking and less exposed to ESG risks, including climate risks.”


With ongoing risks from political tensions and trade wars, the short-term outlook for equities remains challenging. NN IP sees scope for a positive tipping point, however. There is strong potential for fiscal stimulus to lower the currently high equity risk premium, which is compensating for secular stagnation risks. If this were to occur, the preferred asset allocation would shift towards equities, away from growth sectors into value stocks, and from US investments towards non-US investments. The Eurozone and Japanese markets would be the biggest regional beneficiaries. From a sector point of view, financials would outperform the bond proxies of utilities and real estate.

If fiscal stimulus and looser monetary policy are put into play, this will create a strong case for European equities, which are currently undervalued on a historical basis. Within European equities, NN IP prefers cyclicals over defensives, as they look set to outperform the traditional safe havens.

The 2020 outlook for sustainable equities is also bright. Investing with a sustainable focus not only benefits society and the world around us but also leads to stronger risk-adjusted returns. Companies with a sustainable focus will continue to benefit from the transition towards a more sustainable future. Within the sustainable equity space, NN IP favours firms with a focus on renewable infrastructure and utilities, companies engaged in sustainable agriculture and protein production, and solution providers in the healthcare space. We believe these companies will continue to benefit from the transition to a sustainable future.


Commodity markets are caught between a softer demand outlook and threats to supply. Going into 2020, commodity demand is likely to weaken. A more pronounced slowdown in global economic growth is likely. This means continuing weakness for manufacturing, a key sector for commodities, and more negative spill-over in the services sector, which so far has proved resilient. A stronger US dollar, especially versus emerging market currencies, will further dent commodity demand and simultaneously diminish commodity producer costs, thereby increasing supply.

However, this sober outlook could improve dramatically if a sustainable breakthrough takes place in trade talks, or if the fiscal policy taps are opened in developed markets and China to complement continued loose monetary policy. But the likelihood of a sustainable de-escalation in trade relations and a sizable pre-emptive fiscal expansion is still low. Industrial metals and energy, both cyclical segments, are expected to be pressured from this angle. Precious metals could again be most favoured next year.

Real estate

The forces of secular stagnation, in combination with loose monetary policies, are expected to hold safe bond yields low for longer. This will keep the search-for-yield theme alive, and real estate is a clear beneficiary. Its dividend yield not only exceeds yields on equities but stands out more favourably versus negative-yielding government bonds or low-yielding corporate paper. This will act as a positive driver for real estate in 2020, much as it did in 2019.

The challenge for real estate is that the asset class is already substantially overweighted in investors’ portfolios. Additional flows to real estate may therefore be limited. And if the economic slowdown spills over to the consumer side via a weakening labour market, this will temper demand for real estate segments such as offices, retail space and residences. This would add to the existing structural headwinds to the asset class, such as e-commerce in the retail sector (which is itself beneficial for real estate logistics) and the trend towards flexwork, which is reducing office demand. All of this could be cushioned if politicians were to expand their budgets. A fiscal boost would simultaneously increase the safe yields to which real estate prices are negatively correlated.

Emerging markets

Economic growth in emerging markets is expected to remain below 5% in 2020. Protectionism and a negative globalisation trend continue to create headwinds while political risk is likely to keep downward pressure on economic growth. The outlook for EM equities remains rather bleak, due to the poor growth picture and our expectation that the trade uncertainty will not go away before the November 2020 US elections.

Still, the low global interest-rate environment and the search for yield should help sustain portfolio flows to the emerging world. Given the moderately high real yields and benign inflationary backdrop, emerging market central banks have some room to ease monetary policy, so economic growth could pick up modestly in the course of 2020. This would provide technical support for emerging market debt, for which valuations remain attractive.


Which of the two potential outcomes will prevail is the essence of the 2020 market outlook. The chances of a sustained policy pivot appear slim, but market moods are improving in this respect, as political risks stemming from Brexit and trade tensions have begun to recede. A vigorous stimulus would push up consumer and business confidence while simultaneously tackling the causes of social unrest. This would be a true game changer for risky assets, particularly equities, where risk premiums are historically high. Within equities, European stocks and cyclical sectors would be the prime beneficiaries, with financials set to outperform bond proxies. With regard to fixed income, spread markets should continue to benefit from the ongoing search for yield, as risk appetite will likely remain supported by global liquidity. Meanwhile, in an environment of ongoing climate unrest and uncertainty, green bonds and sustainable equities should continue to flourish.