Three Trends to Monitor in 2020
Every January, we point to three trends cash managers should keep an eye on in the coming year. In 2019, we hit the nail on the head when we highlighted the inverted yield curve, trade wars, and Brexit. Each of those issues kept institutional cash managers busy all year. First, the Fed reversed course with rate reductions to ease inverted-yield-curve recession anxiety. Then, start-and-stop trade negotiations with China kept equity investors guessing. And finally, the Brexit political drama in the U.K. dragged on all year until a December election saw Boris Johnson grab the reins of power and finally promise a 2020 exit from the EU.
We wish we could promise you a less eventful 2020, with predictable interest rates and a more stable economic environment. But this year’s hot topics have the potential to be equally exciting. First, will we see any more rate reductions from the Fed? Good question! Second, the liquidity crunch that materialized in the repo market last September shows no signs of abating. In fact, we expect it may take months for the Fed to find a permanent fix. And third, we expect 2020 will be the year it becomes clear that environmental, social and governance (ESG) investing guidelines, once considered a fad, will be with us for the long haul.
Our January white paper—2020 Vision: Watch the Fed, Repos and ESG Investing—covers each issue in detail. The Fed got some credit in 2019 for rate cuts that helped maintain a full-employment, low-inflation economy. And with growth continuing at a moderate pace in 2020, the Fed seems to want to stand pat. But with a manufacturing slowdown, geopolitical uncertainty, and a presidential election, betting odds have increased that the Fed will cut rates at least once more in 2020.
Meanwhile, contrary to expectations that it would be a one-time thing, the surprise liquidity crunch in the repo market in September has kept the Fed busy providing temporary liquidity fixes. It will be important to keep an eye on longer-term solutions the Fed may deploy. Especially if they have the potential to impact rates and returns for other short-term liquidity investments.
Finally, what may seem to be the most unlikely issue to make our list might well be the most important. ESG guidelines have moved to the forefront of many large fund managers’ concerns over the past several years. While many cash managers still view ESG investing as a fad that will pass, our white paper shows why it’s most likely here to stay. Codification of ESG investing rules in the European Union is just one reason. The good news, though, is that ESG investing tends to encourage best practices in assessing credit risks. By forcing you to take a wide-angle view of potential risks you may not have been aware of before, it can prevent mistakes when you are investing in markets where regulatory changes and public-image concerns can have a material impact on a company’s creditworthiness.
January is a good time to sort out your strategic priorities for the coming year. To get 2020 off on the right foot, take a look at our latest white paper. It will give you a clearer picture of both the forest and the trees.