Home Review of 2019
Markets defy weakening growth
Fed turns as global manufacturing weakens
Global growth and manufacturing sentiment have been weakening since the USA first imposed tariffs on China and other countries. Problems in the German auto sector only exacerbated the weakness. But because the US economy held up, in large part thanks to the 2018 tax cuts, the US Federal Reserve (Fed) projected continued rate hikes going into 2019. After equities corrected sharply in late 2018, the Fed changed course, moving to policy easing.
Bonds rally across the board
US Treasury yields declined sharply, though not quite to post-financial crisis lows as fears of a global downturn took hold. In Germany and Switzerland, yields reached historic lows, with all now below Japanese levels. Despite far higher debt, the rally also took hold in Italy as the government moved away from its anti-euro and anti-Brussels stance. Emerging market bond yields also fell, though not quite as much.
Commodities: Diverging paths
US tariffs on China and the slowdown in global manufacturing weighed on industrial metals such as copper. As for oil, early 2019 saw prices recover as the Organization of the Petroleum Exporting Countries sought to restrain supply. But prices softened again as demand slowed. Meanwhile, gold prices rallied on the back of lower interest rates.
Equities: Testing highs
At the start of 2019, the major equity markets rebounded strongly after their setback in late 2018, fueled by the Fed’s shift to policy easing. The rally stalled temporarily mid-year on mounting worries over the global economy. Emerging market (EM) equities rebounded as well. But whether the underperformance vs. developed markets that began with the start of the US-China trade war in early 2018 has been broken remains to be seen.
Equity sectors: Gains across the board
All of the major equity sectors participated in the early 2019 rebound, but only IT managed to build decisively on its gains. In contrast, demand concerns and lower oil prices held back energy, while the drug pricing debate in the USA weighed on the healthcare sector’s performance. In view of weakening manufacturing demand, it is surprising that the industrials sector held up so well. Financials slightly underperformed the MSCI World, as flat or inverted yield curves dented earnings.
USD still strong
After 2018 gains, the USD continued to appreciate against almost all major currencies, supported by better US growth and the (remaining) interest rate advantage. Only the JPY gained once again, as the Bank of Japan did not lower rates. China allowed the CNY to devalue to offset some of the tariff-related pressure. This weighed on other EM currencies, in addition to local rate cuts; only the MXN held up as the country reached a new trade agreement with the USA and Canada.
Main asset classesMost asset classes showed a strong performance in 2019. Investors should not expect to see this feat repeated in 2020 although financial assets will likely continue to benefit from generally low yields.
Alternative investmentsAlternative investments have become increasingly established as a building block of portfolios, particularly in today’s world of low-for-longer interest rates and yields.
Investment strategy 2020Now that interest rates around the world have reached record lows or slipped into negative territory, even risk-averse investors will need to buy higher-risk assets to generate positive returns.