No alternative? TINA is out – we are ready for 2019
The TINA principle (= there is no alternative) seems to be out. The world economy is in for an interesting year in 2019. Global differences in growth, monetary policy, and geopolitics will likely present investors with challenges.
Look-back at global economic development
In 2017, global accelerated growth and monetary easing around the world led to new highs on the stock markets. In 2018, corporate profits also increased impressively. However, geopolitical and economic policy tensions between the US and China, a multilateral trade conflict, and political differences in Europe have unsettled investors. Emerging markets were affected in two ways: one was the trade conflict, the other was the strength of the US dollar.
While Europe's political disputes prevented interest rate normalization and weakened the euro, the tax reform in the US meant that a prime rate increase was almost inevitable there. The result gave US investors access to a risk-free alternative to equities for the first time in ten years. TINA (= there is no alternative), the monetary policy of maintaining a state of investment crisis since 2008, seems to have disappeared – for the first time in a decade. Or is the TINA principle actually not quite out?
The momentum of the world economy is slowing down
Where are we headed now? In principle, some of this year's developments are likely to continue for the time being: Profits will increase, but more slowly. The momentum of the world economy is thus decreasing. An increase in prime rates, at least in the first half of the year, is likely to be limited to the US. However, this should not lead us to jump to conclusions. Stock markets immediately adapt to changed circumstances.
For instance, if the Federal Reserve were to increase interest rates two more times, this would hardly affect the markets, because this development is already largely included in the prices of futures. And even slower profit growth can be viewed positively by investors if the markets had feared worse beforehand. Negative revisions of valuations and earnings have recently been as substantial as during the euro crisis of 2011.
TINA principle is prevalent in Switzerland
The TINA principle – the assumption that there are no alternatives to investing in equities – remains valid in Europe. In Switzerland, dividend yields are at an impressive 3.5%, while prime rates are negative. In light of this discrepancy, you might ask yourself what investors are waiting for. In addition, this observation qualifies the frequently expressed view that low prime rates or expansive central banks were the main pillars of the latest equity boom.
TINA principle not very helpful in 2018
As a matter of fact, TINA was not much help to either the Swiss or the European stock markets this year. Despite the state of investment crisis, European pension funds have fewer equity holdings today than the average for the last 50 years. Furthermore, central banks largely invest in bonds, not equities. The doubling of SMI corporate profits over the past ten years explains the simultaneous index doubling and points less to the Swiss National Bank. This also applies mutatis mutandis elsewhere: Apple's, Amazon's, and Google's stock price increases, for instance, were due less to monetary policy than to their above-average profit growth. Furthermore, a large part of all equity purchases of the last ten years did not come from investors, but from companies buying back their own shares.
Yes, we expect a good investment year in 2019. However, it will also be an "interesting" year – a positive one, but not an easy one.
This raises the question of whether the "TINA syndrome," which refers to a general state of investment crisis, is perhaps more of a psychological phenomenon than a monetary policy one. The trauma of the 2008 financial crisis better explains the subjective sense of urgency felt by many investors than the comparatively lackluster monetary policy of the last ten years. However, market psychology can turn in the opposite direction. This is also the reason why the chances for a more positive year after a bad 2018 are better than they might currently appear. Yes, we expect a good investment year in 2019. However, it will also be an "interesting" year – a positive one, but not an easy one.