As the decade came to a close, the equity bull market that commenced in the aftermath of the global financial crisis extended its run to another year, with a number of developed markets recording their most sizeable equity returns since 2009.
The S&P500 (+28.9% for 2019), FTSE100 (+16.7%), Nikkei (+19.9%) and Eurostoxx (+22.4%) all closed the year at, or close to, all-time highs, marking a notable recovery from the manner in which 2018 ended. It could be argued that the perhaps surprising performance of equities in 2019 can be partially attributed to the easing by the major central banks; a combination of lower interest rates, while further QE buying boosted investor appetite for risk-on assets.
Despite energy commodities ending 2019 well below the levels of 2018, Russia (+43.2%) and Brazil (+26.9%) posted strong returns into the end of the year. However China (+9.7%) and India (9.6%) fared less well with trade tariffs stalling Chinese returns, and questions over Prime Minister Modi’s reform implementation holding back Indian performance.
In the December UK general election, the Boris Johnson-led Conservative party won a strong mandate to “get Brexit done”, briefly pushing sterling above 1.20 versus the euro and 1.35 versus US dollar, its strongest position since the days immediately following the 2016 referendum. The emphasis for the Prime Minister will now be on a smooth exit from the EU and the signing of various trade agreements to ensure Britain’s place as a leading global market participant remains intact.
With the US presidential election less than 12 months away, President Trump indicated that he has his eyes firmly on re-election in November 2020. Incentivised to deliver a strong equity market, and make the distractions of impeachment and immunity from prosecution disappear, Trump has shifted to an easing of trade tariffs especially with regard to China, the imminent “phase one” agreement will be signed in mid-January 2020, bolstering both US and Chinese equities in the final weeks of 2019. Trump’s announcement of cancelling planned tariffs on Chinese goods, while also reducing those previously introduced has removed a considerable overhang on both countries’ equity markets.
In Q3 2019 many analysts were sounding the alarm bell as the US yield curve inverted; each US recession of the past 50 years has been preceded by inversion of the yield curve. However, with factors such as abundant liquidity in the final quarter of the year, the yield curve dynamics retraced and by the penultimate day of the year had reached its steepest point since October 2018, an indicator perhaps of a return of investor confidence, although for how long it remains as steep is questionable. It is still to be seen if the yield curve inversion is as prophetic as before, or whether the “new normal” in which we are living; with negative interest rates and QE measures lifting market optimism yet higher has materially changed the value of this indicator.
In an environment of increased liquidity, bond markets also provided positive returns in 2019, with all leading US bond markets contributing, despite a tail off in prices through December; high-grade corporate debt (+14.5%), high yield (+14.3%), Treasuries (+6.9%) and mortgage backed securities (+6.4%), with the resultant impact of lifting the Bloomberg Barclays Aggregate Bond TR 8.7% in the year. Enhanced liquidity via the US Fed’s recent balance sheet expansion (c.37% annualised) is proportionately similar to the expansions that precipitated the dot.com bubble and that following the 9/11 attacks. The increase to the Fed balance sheet is expected to continue through the opening half of 2020.
With the US Fed in easing mode with three rate cuts in 2019, the environment for emerging market debt was typically benign throughout 2019, helping to lift the JP Morgan EM Bond Index Global 14.4%, while the Bloomberg Barclays Corporate EM debt added 13.1% in the year. Inflows to EM debt increased throughout the year as investors embraced the lower-than average volatility of this asset class, combined with its compelling low correlation to developed market assets.
After a busy year for central bankers, monetary policy is expected to take a back seat through 2020 for developed markets, with the prospect of a continuation of tepid growth, which given the rate cuts through 2019 from many central banks, will provide some challenges due to the existing lower rates. EU bankers found themselves caught out by having less wriggle room and thus having to move further into negative interest rate territory. Sweden’s Riksbank ended its near ten-year experiment of negative rates in December, moving their benchmark rate to zero, so it will be interesting to see how others react to this move. The ECB, in a diversion from its history of appointing economists as its president, now has lawyer and former IMF Chair Christine Lagarde at its head. Outgoing president Mario Draghi cut the deposit facility rate to -0.5% from -0.4% in one of his final actions before handing over the reins. Lagarde cut a cautious tone in her mid-December meeting setting out details of the banks first strategic review since 2003. A consensus driven policy direction is expected, at least until the review is completed towards the end of 2020.
Following its third rate cut of the year in October the US Federal Reserve has reversed the rises implemented since June 2018, taking the headline rate to 1.75%. On the other hand, the Bank of England have maintained their rate of 0.75% which was initiated in August 2018, with no change in Governor Mark Carney’s final year in charge. Carney is to be replaced by Andrew Bailey, the chief executive of the Financial Conduct Authority in March 2020. The People’s Bank of China (PBOC) made no rate changes in the final quarter of 2019, however started 2020 with a 50bps cut to the reserve requirement ratio, which is estimated to inject c.$120bn into the economy, and can perhaps be partially attributed to the thawing of US-Sino trade tensions. Global economic analysts are anticipating a shift from monetary policy to fiscal stimulus from decision-makers in their push to stimulate growth across the world.
In currency terms, in the majors, the US dollar was the place to be, while from a frontier perspective the Ukrainian hryvnia was a standout performer returning 16.6% against US dollar. The US dollar benefitted from nervousness of investors as the currency’s safe-haven status ensured a robust performance, albeit tempered somewhat in the final quarter following the rate cuts. Mild US dollar weakness would be a result of continued investor optimism, which would augur well for emerging markets and growth assets. European worries such as concerns of a German recession, growth fears and the usual Italian risks resulted in the continued aversion to the euro despite the aggressive action taken by Draghi in Q3 2019 prior to his departure as governor of the ECB.
With the new year barely a few days old, markets were reminded that complacency is an extremely dangerous trait with stocks and commodities jolted by the news of the US’s executive action to eliminate the head of Iran’s elite Quds military force, Qassem Soleimani. Oil prices reacted upwardly as the news broke (+6.7%), as did gold and other perceived safe-haven assets with investors redirecting flows as uncertainty returned. Iran’s rhetoric, as expected, was of threats of violent retaliation that will keep investors on their toes, and oil prices elevated, at least in the short term. This “victory” was championed unsurprisingly by Trump, in yet another diversionary tactic from his troubles closer to home.
Other issues likely to be faced in the New Year include yet further political uncertainty with the US primaries followed by the November election and the UK-EU unravel with most forecasters anticipating a positive yet muted environment for risk assets in 2020 compared to the returns witnessed in 2019. It should be expected that a greater understanding of risks and asset class correlations, and hence diversification management, will be required to produce above-average returns through 2020.