Economic cycles don’t die of old age – 2020 with UBS

January 3, 2020

Just as the North East is part of the UK economy, the UK is part of the global economy and as such, is exposed to both its risks and opportunities. Richard Dawson speaks to Dean Turner and Aidan Dunstan from global wealth manager UBS about trends they are forecasting in 2020, the growing emphasis on sustainable investment and the impact politics can have on investor confidence

Ever since the globalisation of the world economy in the early 1990s, the fate of local and national economies has increasingly been tied up with developments in international trade, finance and politics.

What happens in America is no longer separate from what happens here, which depends on what happens in Europe, which is affected by what happens in China and so on. That’s why it’s important to have a global perspective when thinking about what the forthcoming year might bring to the North East.

This is one of the key messages of the Year Ahead 2020 from global investment bank and wealth management firm UBS.

“As much as we like to talk about the UK, we’re a very open economy and what happens on the global picture will have a very important bearing on the domestic economy and financial services in general,” says Dean Turner, economist for UK investment at UBS.

The report highlights a number of areas of concern for investors and looks at more long-term trends for the next decade, describing what might shape investor behaviour, fiscal and monetary policy and political choices in the years to come.

It will come as no surprise that in the UK context, ongoing political uncertainty over Brexit has been a major barrier to growth and investment over the last 12 months. Now that Boris Johnson has a clear mandate to take us out of the European Union on January 31, much of that uncertainty should soon abate. But UBS is clear that this is only one piece of the puzzle.

“In terms of what this means for the UK economy, it probably points to a period of continued sluggish growth,” explains Dean. “The chances of a bounce in activity or a much stronger recovery are quite limited because we’ve got the whole phase two of the negotiations still to go through.”

As important as getting a resolution to Brexit sooner rather than later is for the fate of the British economy, Dean believes that “what happens with the US and China is likely to have a much bigger impact on the global economy over the next 12 months than anything else.”

Although it was predicted that 2019 would see a slowdown in global growth, the US-China trade war has accelerated this slowdown by a magnitude that financial services providers such as UBS had not anticipated. As such, trade relations between the world’s two largest superpowers are likely to determine the pace of growth in the year ahead as well.

Owing to this unprecedented uncertainty in international trade, fund managers are encouraging investors to turn towards companies with a much higher exposure to domestic markets – thought to be more robust.

Dean reflects: “The weakness in the global economy is in international trade. That kind of tilts us towards markets with a strong domestic exposure, such as the US and Japan, and makes us very cautious on markets like the Eurozone.”

In addition to Brexit and the US-China trade war, another trend that is likely to have a big impact on financial services and investment returns moving forward is what UBS describes as the “low yield environment.”

This phrase denotes changes in the pattern of behaviour from central banks, which have moved from hiking to cutting interest rates. Central banks often use interest rate cuts to stimulate investment by making the cost of borrowing lower, but obviously for investors, lower rates can have a knock-on effect on portfolio returns or savings.

Dean comments: “What’s been described as the hunt for yield has been quite a big driver of portfolio returns and when we’re looking at the world today, there doesn’t seem to be that much value left in bonds because expectations of lower interest rates are pretty much baked in.”

UK interest rates are currently at 0.75 per cent but given the need for stimulus amid sluggish economic growth, it is widely expected that the Bank of England will cut to 0.5 per cent this year.

What UBS is keen to stress, however, is that despite the challenges with Brexit, with international trade and with the low yield environment, going into 2020 there are still opportunities for good returns and investing is still a better option than keeping cash on the sidelines.

One of the biggest opportunities, not just for 2020 but for the next decade and beyond, is sustainable investment. The increasing environmental challenges associated with climate change are going to have a profound effect on how investment is directed in the future.

This is very much the sentiment espoused by outgoing Bank of England Governor Mark Carney, who has used his platform repeatedly this year to stress how important it is for the world’s banks and businesses to take the climate threat seriously.

In an interview with The Guardian in October, he said: “There will be industries, sectors and firms that do very well during this process because they will be part of the solution. But there will also be ones that lag behind and they will be punished.”

The challenge for investment banks such as UBS is to identify those high growth areas and put together portfolios that contain the kinds of companies that are going to help us green the global economy.

“Sustainable investing is very much a part of our plans,” Dean admits. “Putting my economist hat on and thinking about what’s going to be a key driver for a number of governments, in terms of how they’re going to direct fiscal spending over the next decade, there’s going to be an emphasis now on greening the economy.”

As much as the push towards sustainable investment is being led by the governments and central banks of the world, Aidan Dunstan, executive director of UBS for the North East and Yorkshire, reveals that there is a strong desire for sustainability at the local level too.

“What we’ve seen on the local, sustainable side of things is that it’s actually being led by demand from investors, particularly younger generations, who are saying, ‘we want to have sustainable investment’,” he says.

A common misconception when thinking about investing in sustainable businesses, industries and markets, is that returns will be much lower because of the perceived cost associated with trying to ‘do the right thing’.

But as Aidan explains: “We’ve done a lot of back-testing on the performance of sustainablestyle portfolios and, the old adage of, you’ve got to sacrifice a bit of performance in order to do the right thing, is not true anymore. You’re actually able to get just as good a return on your investments.”

There’s also another angle to sustainable investing that’s about more than putting money into companies that are green and energy efficient. Sustainability is also about good terms and conditions for workers, paying fair wages for fair work and making mental health and staff wellbeing top priorities.

Aidan adds: “That makes sense for the employees of course, but it also makes sense for the employers because you’re going to get a loyal, more productive workforce.”

Despite the opportunities that exist with sustainable investment and the industries of the future, lots of potential investors are still holding back cash from the markets. UBS has noticed this with its own clients, which is not surprising given the uncertainty and geopolitical tensions already outlined.

Dean also posits that this unwillingness to invest could indicate that the global economy is a victim of its own success.

“This is the longest economic expansion in history,” he explains. “We’ve basically had ten years of unbroken growth and a common push back is that if this is the longest expansion, surely it’s about to come to an end.”

Of course, this expansion could come to an end at any time. Statistically, there’s at least a ten per cent chance of a recession in any given year. But as Dean says: “Economic cycles don’t die of old age.”

This unwillingness to invest in a context being described as the longest economic expansion in history is interesting because it shows just how much of an impact politics can have on confidence. It also contradicts the old assumption that when it comes to economics, the politics don’t matter.

Dean continues: “Unfortunately, that argument is a bit tired now because as we’ve learned over the last two years, politics is actually starting to matter to investment markets.”

In lieu of the clear challenges facing financial services over the next year and indeed the next decade, whether it be from political uncertainty, trade disputes, low interest rates or low confidence; the key to protecting investments is still diversification.

“Investing is always uncertain. It’s always been a key mantra of ours that the best way to grow a portfolio is to avoid the pitfalls and the best way you avoid the pitfalls is by diversification because that spreads the risk but also gives you exposure to good opportunities as well.

“Going into 2020, the risks feel a little bit more two-sided and we could see some upside to that.”

Read more from the Year Ahead 2020 at

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