2019 was characterised by an evident dislocation between stock market returns and economic growth. Indeed, all major asset classes posted robust gains amid flat earnings growth and lowly GDP levels across developed countries. Manufacturing weakness and geopolitical uncertainty weighted on global GDP’s where corporate confidence levels, capital expenditure and inventories were largely hit. Monetary policy easing fuelled performance in major asset classes, boosting valuations on stocks and bonds alike.
So while a global manufacturing slump, heightened geopolitical tensions and easier monetary policy shaped financial markets over the year, stocks have delivered the strongest returns over other asset classes as equities in developed markets continued to rally consistently all through the year’s end, with some indices surging to historical highs during the Santa Claus rally period.
US equities generated approximately 30 per cent in total return, putting it on course for its best calendar year performance since 2013. Overall, as the earning season came to an end, the large majority of companies reported to beat earnings estimates albeit the latter had been lowered throughout the year.
Utilities, real estate and consumer staples led the way over the first nine months as investors emphasised income and defence in the face of lower interest rates and slowing economic growth. The defensive healthcare sector which was screened inexpensive delivered strong total return over the last quarter. Yet, cyclical sectors were aided by central bank’s easing and the technology sector continued to top the chart over the last three months closing the year ahead of peers.
Fundamentally, the technology and consumer discretionary lead the way and, over the years, strong and improving fundamentals have been good indicators of sector performance in terms of growth and profitability. Energy has been the worst performing sector, affected by crude oil prices. Oil has raced up almost 25 per cent following its best first quarter since 2009.
In Europe, the latest improvement in the German manufacturing PMI from a low level has been encouraging, while the third-quarter GDP reading confirmed that Germany narrowly avoided a technical recession. Although some rebound in manufacturing surveys appears to be underway, overall business sentiment showed to be somewhat mixed.
“All major asset classes posted robust gains amid flat earnings growth and lowly GDP levels across developed countries”
Overall, though, markets focused on the improvement in the manufacturing data and European equities registered a healthy return in the region of 24 per cent over the year. The DAX is up there too while the UK’s FTSE delivered low double digit returns amid concurrent Brexit and political woes.
It has been a very positive year for credit with tightening in credit spreads and a strong support from monetary policy in China, Europe but particularly in the US. Treasuries, have made a whopping return after yields plunged providing for the best returns in the last four years. Global IG posted positive returns YTD where quality credit has lent us support over duration over the year. Global Developed High Yield markets also posted good returns.
In the US, the policy remained accommodative with a dovish Fed amid controlled inflation with US investment grade returning not just double digit returns but the best total yearly return in a decade. It’s a different story in a stagnating Europe, but markets have shown that they can trade a sustained low growth environment.
Government rates contribution over the year was positive and, especially in Italy, spreads versus the German Bund tightened in light of an improved political backdrop. German Bunds have had their best year in five years, making roughly 5.5 per cent in euro terms as the yield on 10-year debt dropped below zero percent for the first time since 2016 in March. In comparison to the US peers, the European high quality bonds posted a return in the high single digit.
Whilst it has been just a great year for asset classes, the suspense is to what the year ahead shall bring as renewed bout of trade tension and further weakness in China are key factors to monitor in 2020. PMIs have tended to pick up when central banks ease and such monetary accommodation has implied a higher likelihood of recovery in capital spending. The market has historically anticipated that bounce, boosting cyclicals. In the fixed income space, the expectation is for central banks to remain accommodative with the hope that governments turn on the fiscal taps.
Loredana Vella is an investment analyst at BOV Asset Management.
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