(Bloomberg) -- The global economy and earnings will stabilize in 2020, allowing riskier assets to flourish even with central banks keeping policy little changed, according to Goldman Sachs Group Inc.
The investment bank’s top market themes for next year include growth stabilization, upside for cyclical stocks and a “baby bear market” in bonds, said strategists including Lotfi Karoui, Zach Pandl, Kamakshya Trivedi and Jeffrey Currie in a note Thursday.
“We see upside in a variety of cyclically sensitive assets,” the strategists wrote. “At the same time, we are not expecting the type of go-go global growth environment that would sink the dollar or result in a major bear market for bonds.”
Despite the impact of the U.S.-China trade war and concerns over global growth, both stocks and bonds have climbed in 2019 thanks to easier monetary policy from the world’s central banks. The MSCI measure of global stocks is up 19% through Friday and the yield on 10-year Treasuries has fallen over 90 basis points to 1.77%.
Goldman sees room for cyclical stocks in the U.S. and emerging markets to continue to gain momentum, but expect the benchmark Treasury yield to rebound to 2.25% next year.
Read: Goldman Joins Pound Bulls Seeing Brexit Boost in Top 2020 Trades
The U.S. dollar will come under mild pressure given the expected pickup in global growth but its decline should be limited to around 2% on a trade-weighted basis, according to the note. In China, policy measures should provide a supportive backdrop for the yuan with index inclusion giving a boost to local currency bonds.
Read: China’s Economy to Stabilize in 2020, Goldman Sachs Says
Meanwhile, the deterioration in market liquidity conditions stemming from the financial crisis remains a major source of vulnerability for investors, the strategists said.
“We expect moderately better economic and earnings growth, and therefore decent risky asset returns,” they wrote. “But we also see plenty of risks, and more challenging valuations, so the upside is limited.”
Here’s a selection of Goldman’s top trade ideas, taken from a separate report:
Stay long 10-year U.S. breakevensGo long the MSCI emerging markets index of stocks, with a hedgeLong cyclical versus defensive developing nation equitiesShort 10-year U.K. giltsShort the euro versus the poundLong Italian over Portuguese sovereign bonds
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