‘Markets can stay irrational longer than you can stay solvent’ was a painful lesson learnt by bears in 2019. The Fed’s liquidity trade is set to define 2020 and continues to spur investors’ perpetual hunt for yield. But the beat of fat tail risks and the attraction of recession hedges only grows louder.

Liquidity and central bank pause underpin bull case

The combined backdrop of ongoing Fed liquidity into repo, wait-and-see attitudes from major central banks, and stubbornly low and negative interest rates should continue to support quality risk assets globally in 2020 as investors maintain their perpetual search for yield.

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Growth easier said than done

Revving up growth seems harder than central banks think despite loose financial conditions. Signs of stabilisation came through in late 2019 as manufacturing sentiment steadied and US-China risks ostensibly faded. But incipient capex spending and unresolved trade uncertainty likely caps any significant rebound. Whatever the case, the trajectory of growth is a key driver of asset allocation in 2020.

Volatility at historical lows keeps 2020 interesting

While we’re net bullish on 2020, we recognise there are a growing number of themes that could lift volatility from historical lows, and in turn, mediate risk sentiment in broad strokes. This includes weak US growth, resumption of trade fears, disastrous manufacturing, US election and lagging fundamentals to name a few.

Figure 1: Asset inflation has tracked Fed balance sheet expansion in Q4 2019

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