Eiger's 2020 Forecast
What does our crystal ball say about 2020? Return expectations need to be adjusted downward with stock market and real estate prices at all-time highs, and interest rates still relatively low.
2019 sure was an exciting year with lots of changes. We wanted to thank you all for your support and friendship. We wish you a peaceful and prosperous 2020 and look forward to deepening our relationships. As we prepare for the New Year, we wanted to share what our crystal ball says about 2020.
Overall, we are guardedly optimistic about 2020 but return expectations need to be adjusted downwards with stock market and real estate prices at all-time highs, and interest rates still relatively low compared to historical norms.
We don’t expect a U.S. or European recession this year. Europe will likely lag the U.S. but could outperform with a smoother than expected Brexit, stabilization of the European Union, and modest growth.
Despite our optimism, we expect to see increased volatility in the markets and muted performance numbers.
Even with increased real estate values, private real estate appears reasonably priced.
Cap rates have gone down, but the spread between real estate cap rates for sales of existing buildings and the 10-year Treasury has actually increased rather than decreased, providing an argument that real estate, although more expensive, is now at reasonable values.
Nonetheless, we are still big believers of real estate being a part of every portfolio, and that in the long run, private real estate is still an attractive investment.
As expected at this point in the real estate cycle, we are seeing fewer opportunities on the equity side. For new real estate exposure, we feel more comfortable investing on the debt side in shorter, fixed-term, floating-rate investments.
The U.S. election will increase the markets’ volatility through headline driven, short-term reactions. But volatility aside, markets tend to like gridlock in Washington as it usually precludes the passage of any landmark legislation.
If we see progress in the U.S./China trade dispute, markets will temper and international equity markets could outperform U.S. markets. But a trade war could easily trigger a recession.
Conflicts in the Middle East add the usual uncertainty to market forecasts. Last week’s killing of a prominent Iranian general further increased the prospects of intensified conflict. Continued tensions will further increase volatility in the markets.
The U.S. economy is heavily dependent on the consumer for growth. Consumer spending alone makes up approximately 70% of U.S. GDP. We expect progressive deterioration of consumer spending in some key areas. As a result, markets may face added stress in 2020.
The U.S. labor market is looking good, but there are downtrends emerging in some key segments. For example, payroll growth is slowing (partly because of a lack of skilled workers for the jobs that are open).
The massive amounts of injections into the financial system from central banks for over ten years could develop a bubble.
Despite an oversupply of natural gas and advancements in renewable energy sources, we expect continued volatility in the energy markets. The U.S. is expected to run out of gas within 30 years and other developed nations are not ready to fill the void.
The main reasons for a possible economic downturn in 2020 that we will be watching include:
US/China trade disputes
Growing tensions between U.S. and Iran
A continuation of the European economy slowing down
Italy potentially leaving the EU
Possibility of a southern European banking failure
Excess liquidity in the markets
Increased dovish outlook from the U.S. Federal Reserve
We continue to monitor the markets and keep an eye out for attractive opportunities. Don’t hesitate to reach out with any questions or comments. Here's to a Happy New Year!