From a fraught geopolitical landscape to a global slowdown, the major systemic risks in today’s investment landscape are impossible to ignore. We expect such risks to contribute to persistently low and negative yields as well as to bouts of volatility in 2020. With bond yields near historic lows, can fixed-income markets generate solid returns without forcing investors to take too much risk?

Evaluating Systemic Threats

Populist policies and geopolitical tensions—in many ways intertwined—are on the rise. Weaponized conflict isn’t the only risk. The trade war between the US and China has hurt global trade, causing business confidence to falter and manufacturing output to decline. Trade-sensitive economies such as Mexico and the euro area have been hurt the most, while ironically China and the US have seen less damage.

Washington and Beijing made progress toward a trade deal late last year, but some manufacturing indicators that have stabilized since then have done so at levels consistent with contracting output. At any rate, recent progress could reverse with a single presidential tweet.

Could the outcome of the 2020 US election resolve the volatility generated by a populist policy thrust? We don’t think so. Both wings of the US political spectrum support a shift toward trade protectionism, for example, while the center remains skeptical. Furthermore, the rise of populism is a global theme, as evidenced by the continuing and messy Brexit saga. According to the Tony Blair Institute for Global Change, the number of populist leaders around the world has increased fivefold since 1990.

Not coincidentally, the world economy now faces a challenging year and may be entering a protracted period of slower growth. A global slowdown could leave the world even more vulnerable to adverse shocks.

Central banks have sprung into action, and we may see further monetary easing this year. But it will be tough for easier monetary policy to be effective at a time when interest rates in much of the world are already at or below zero. And aggressive fiscal stimulus appears to be off the table, for now.

The picture isn’t entirely gloomy, however.