Recession? Investor please!
Whatever sizzle that buzzword started around global markets (everywhere but Australia of course, as we don’t use that “R” word or such reprehensible language tut tut!), the final quarter of 2019 sure put a fizzle on it! The 25+ global interest cuts since May 2019 finally took effect then? Yeah, you read that number right. Or perhaps it was the “irrational exuberance” (Alan Greenspan speak) exhibited towards the announcement of a “phase one” trade deal between China and the US that really lit a rocket up the market’s…
In any case, equities the world over nodded in approval, and the very broad-based All Country World index notched 6.6% for the quarter and 20% for the year! The range-bounding of six months, the dip sandwiches, the tit of tats, the orange tinted lunacy…all but a distant memory. High fives around and new all-time highs were found. Even those things called bitcoins were being bid up again!
In the US, the major indices recorded quarterly clips of between 7% to 9% and yearly gains of between 19% to 29% (hello Nasdaq!). Dissecting the American market deeper gives a resounding picture as to what really powered indices over the course of the year. Tech stocks! Its outsized (personally this writer prefers “insane”…tomato tomahto) valuations account for a very large portion of these indices’ market capitalisations. Consumer staples and financials barely blipped for a mention. Nearly every other sector finished flat or underwater. But hey…no recession, no problem!
European stocks went 6% for the quarter and returned just under 20% for the year. Data from Germany, Europe’s economic engine, showed promise, while overall Eurozone inflation started to nudge up. U.K asset prices responded favourably to the results of their general election.
Similarly, impressive equity gains, for the quarter and the year, were recorded in Japan, Asia and emerging markets, all characteristically rising from the announcement of the “trade truce” coupled with US dollar weakness in the final months of 2019. Latin America even enjoyed a good year, though it remains mired in a longer-term sideways market. The only region that really “struggled” was Africa, only just managing to stay above water in the period past.
Bonds, globally, were flat for the quarter as investors rushed into equities and government yields went up. But they still finished the year up 7% on average. T’was a good year to be invested then and certainly gave a welcome kick to portfolios in the first 9 months of the year..
Commodities, overall, managed 4.4% for the quarter and 6.5% for 2019. They however aren’t worth shouting about if you look over a longer period, still remaining subdued over the last three years. And if consumption and industrial output is to be gleaned from that, well you have an illuminating insight then. Oil was up 13% this past quarter (and 34% for the year!) but as to yet another demonstration of its volatility, has lost all its quarterly returns at the time of writing!
Safe-haven gold had a bumper year, the best in a few, rewarding investors with 18.7%. But is this telling us something or did investors just lose their minds and buy up every asset they could get their hands on? Gains in copper, while modest for the year, were a positive sign for industrial activity pick up.
On our side of planet, the ASX 200, while flat for the quarter, impressed with 18.4% for the year. And yes if you had to ask, another new all-time high was made before year’s end. Outside our stock market though, consumer spending plummeted to its lowest level since the GFC. New car sales posted their biggest decline in a decade in November. Hardly a week went by without the media highlighting a retail business or chain going under. Business investment is under pressure. Yet the stock market keeps reaching higher into the sky? Must be the prospect of further rate cuts expected in 2020 and perhaps even…quantitative easing? With property taking a beating for most of 2019 and term deposits returning peanuts, who can blame equity investors? While all market sectors enjoyed varying levels of gains, healthcare and tech were the outright standouts. Banks were the year’s major drags. No surprises on our end here, with the love affair many Australians hold maybe slightly in question for some as a ‘new decade’ resolution.
At Private Wealth, our fixed income, domestic equity and specialist type portfolios were flat for the quarter, but international shareholdings managed 6% overall. Where’s the good news you ask?
Well, across the year we managed to score some very impressive wins across nearly the entire risk spectrum. International equity notched 32%, Australian shares scooped up 18% while our alternative strategies netted 14% (don’t fear the volatility!) and fixed income garnered a respectable 6.5%. Not too shabby? In a year where pretty much EVERYTHING went up, we’ll refrain from patting ourselves on the back too much but remain grateful that we managed to turn in another positive year for our valued clients.
So much for that talk of an impending recession then, huh? And what of the yield curves inverting? Or the fact that global growth was actually grinding to a halt all across the globe? It seemed nearly all analysts and investment managers were unified in their belief at the start of 2019, that the investing party of the decade, was about to wrap up. Can’t blame them as there was no shortage of data that pointed to markets being in the late end of the cycle.
What is this then that lies before us? A late, late, late (add however many you want here) cycle? A “mini cycle of recovery” within the late cycle? More classic can kicking perhaps? If you’re confused, you’re not alone. In the years since the GFC, plenty of traditional economics (and life) went flying out of the window. Cryptocurrency, negative yielding bonds, “tech unicorns”, strange aliens occupying the White House and 10 Downing Street, Scotty going to Hawaii as Aussie got too hotty, etc. You get the point.
From this standpoint, here’s what looks to have happened. The largest central bank easing operation of the last 10 years had the intended effect of interrupting the beginnings of another significant market decline. Economic adrenaline is what it took and that’s what primarily gave us a phenomenal 2019, considering the massive headwinds that were upon us.
To think we ended 2018 in a midst of volatility and concern about the threat of rising interest rates in 2019, to a year later having experienced exactly the opposite, gives us a very good reminder as to why strong macroeconomic and asset allocation expertise is required to carefully navigate global investment markets in the current climate. Harry Hindsight can indeed be a wonderful thing, however it was a strongly held view of two of our investment committee members that rates were going nowhere but down in 2019, which would provide a wave stronger than the fresh tubes at Urban Surf in nowhere else but Tullamarine, for the likes of Listed Property, Infrastructure and Government Bonds.
The risks in 2020
And from this view, here’s what we need to prepare for. Geopolitical risks and uncertainties have not gone away, and will most likely intensify. The threat of quickly escalating and armed conflict in multiple regions is very real, along with a pretty nasty flu originating in the world’s engine of growth.
At the time of writing, the economic consequences of a viral disease outbreak are now starting to reverberate across many economies, specifically those closely connected to China. If an actual pandemic eventuates, risks will ratchet up. Trade barriers are still very much in play. The “phase one” trade deal? Sure, that was just a little bit of cream as looking just past the surface, you’d realise that the tariffs didn’t actually go away.
Having said all of that, the BlueRock Investment Committee has actually moved from a position of risk off, to that of optimism, which may well be driven by hot air leading into the 2020 US election and record-low interest rates, however. Hey, those are the cards we’re dealt.
Finding returns that justify the risk in 2020 will be critical, and there has never been a more important time to have a robust asset allocation framework sitting about your portfolio. We have been tireless in our work during 2019 to make sure we have the people, framework, and processes in place to proactively, and quickly, navigate a dynamic global landscape. Don’t go out there alone.
The green shoots then?
A massive liquidity injection is once again underway. And as a result, the appetite for risk assets has consequently grown, as investors jump off the lower yielding asset cart (bonds) and jump on the wagon of equities, real estate and others. So, bearing in mind the need for some insurance against the above described potential downsides, some see this as a green light to look to cyclical/defensive and value type stocks. And perhaps longer term, higher-yielding bonds as well as government bonds (even when rates are low and if 2019’s performance is anything to go by).
If the trade conflict starts to show genuine signs of abating, then with this low rate background, and barring any unexpected shocks, emerging nations and Asia will certainly see renewed inflows into their markets. More so if the USD continues to weaken in the coming months. Alternative assets, specifically those that thrive on volatility, will continue to have their place in any prudently diversified portfolio as the risks of 2019, while successfully muted for a bit, have not gone away.
As we’ve said plenty of times, a good investor’s job isn’t so much to predict the future as it is to do the research, weigh up the evidence and put his/her money behind the best bet. Then skilfully navigate the minefields, come when they may, and deftly cut and run when the tide turns. Here’s to the new year and to the opportunities (and challenges) it presents!