Each year, ETFtrends.com and ETFdb.com conduct a comprehensive review of the macroeconomic trends, policies and financial market themes that will dominate the next 12 months. Here, we introduce the overarching investment topics that are poised to shape the financial markets in 2020 and beyond.

For ETF investors, 2020 will largely be dictated by several major themes, including:

  • The continued spotlight on global trade
  • Potential bouts of volatility due to political risk and the 2020 presidential elections
  • Global central banks maintaining loose monetary policies to promote growth
  • The value style back in vogue
  • The search for attractive yield-generating assets in a lower-for-longer rate environment
  • Seeking out international opportunities
  • Diversifying portfolio risk in the late business cycle

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The Continued Spotlight on Global Trade

The protracted U.S.-China trade war has cooled, with both sides coming back to the table and agreeing on an initial framework for a trade agreement. Optimism that the two largest economies in the world can come to terms has fueled a market rebound and may continue to support investments that will benefit from a recovery in global growth.

However, no definitive trade accord has been signed. The road has been bumpy, contributing to previous short bursts of volatility, and the same could occur in the year ahead as posturing from both sides to get a better deal could contribute to more swings ahead.

Potential Bouts of Volatility Due to Political Risk and the 2020 Presidential Elections

Political pundits and market watchers will be bracing for another hectic presidential election season. With both parties already coming to blows with the impeachment proceedings of President Donald Trump, we are already seeing a glimpse of the potentially heated politics for the year ahead.

There is no sure bet on who will come out at the end of the 2020 elections. Investors should prepare their portfolios for either the continuation of policies under the Trump administration or the potential unknown changes that could occur under a Democratic president.

Global Central Banks Maintaining Loose Monetary Policies to Promote Growth

Central banks around the world have already shifted away from their previous hawkish monetary policy stance to combat rising inflationary pressures in favor of a more dovish outlook to counter potential growth concerns. The Federal Reserve has cut interest rates for the first time in over a decade and has showed its intent to support steady growth through policy changes if necessary.

As global central banks maintain their loose monetary policy outlook, the accommodative measures should help extend the decade-long rally, limit potential recession concerns and support risk assets. Consequently, equity markets could maintain their forward momentum against a backdrop of reasonable growth to support valuations.

The Value Style Back in Vogue

With more investors turning back to the equity markets, many may find pricey or fully priced valuations in the growth segment that has led the charge.

Alternatively, more investors could consider company shares that are trading at prices below their fundamentals or stocks exhibiting cheaper valuations, potentially allowing the value style to shine in the year ahead.

The Search for Attractive Yield-Generating Assets in a Lower-for-Longer Rate Environment

Given the low interest rate-risk outlook and central banks maintaining a loose monetary policy, fixed-income may maintain their three-decade long bull run.

However, in face of the stubbornly low-yield environment, fixed-income investors may consider diversifying into alternative debt securities that provide more attractive yield opportunities, such as those offered by foreign countries and corporate debt securities.

Seeking Out International Opportunities

Speaking of foreign country exposure and the search for value, investors may want to look at the cheap valuations of international markets relative to U.S. markets. Foreign stocks have largely lagged behind the U.S. in the recent market rebound and could offer a more attractive opportunity for investors. Moreover, a strengthening global economic outlook would also help support these foreign countries with large export industries.

However, potential investors should be aware of the potential risks, such as foreign exchange fluctuations, that are associated with international market exposure.

Diversifying Portfolio Risk in the Late Business Cycle

The late business cycle is typically marked by positive but slow rates of growth. Consequently, investors would chase after areas that are pulling ahead of the pack. High-quality, low-risk and momentum company stocks could do well in this phase of the business cycle as rising inflationary pressures and tight labor markets weigh on company profit margins during this phase. More labor intensive sectors like consumer and industrials are more at risk while companies with greater pricing power may stand out.

Investors could also diminish risk by raising more cash, but others have shifted over to fixed-income assets to build portfolio resilience, even at these low yield levels.

The Bottom Line

Now that we’ve introduced the major themes of 2020, you can take a look at our theme-specific content below, where we inform you of opportunities in these volatile markets.

To keep track of major developments in the market, review our News section regularly.

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