All Cylinders Fire in 2019
Annual returns in 2019 for all major asset classes were above historical averages. This was due in a large part to the unusually weak results witnessed in December 2018. In fact, nearly half of the total return in 2019 for the MSCI All Cap World Equity Index (+26.6%) was realized in the first quarter of the year (+12.2%). During the second half of the year, low interest rates and continued leadership from mega cap US technology and communication stocks further buoyed investor confidence. This occurred despite climbing a wall of worry over trade tensions between China and the United States with the potential negative consequences for corporate earnings growth. In addition to attractive financial asset returns, commodity prices saw significant appreciation – particularly crude oil (West Texas Intermediate +34.5%) and gold bullion (+18.3%). For the year, a typical balanced portfolio (60% equity:40% fixed income) produced returns in the mid-teens. This is the best showing since 2013.
2020, Not 2019 but Good All the Same
While investment results in 2020 are unlikely to match those of 2019, overall economic and monetary conditions remain favourable for global capital markets. US employment and US consumer debt levels are the healthiest we have seen in decades. And 2020 is a US presidential election year! There is very little chance the US Federal Reserve will reverse its dovish stance. This bodes well for the US economy. Indeed, we believe the prospects for the global economy look good as well. Brexit is more or less on the rails. Confidence is improving in Europe. With a US-China Phase I Trade Deal, the protectionist rhetoric on trade has subsided – at least for the time being. And again, all of this good news is underwritten by significant global monetary stimulus.
As global economic growth accelerates, we believe that the leadership in the US equity markets will shift to more value-oriented sectors such as industrials, financials and economic cyclicals. Moreover, attractively valued developed international equity markets (United Kingdom, Europe and Japan) should benefit from renewed investor interest and portfolio re-balancing. Similarly, emerging markets, especially large cap Asia ex-Japan (China, South Korea and Taiwan), will likely benefit from reduced trade and geopolitical tensions.
We expect interest rates to remain in a fairly tight range around current levels. This means fixed income returns should closely track the yield to maturity of global bond aggregate benchmarks. The asset class equivalent of treading water, offering little in the way of returns in the near term and as the current economic cycle runs its late course, risky prospects for the future. The bottom line on our strategy for 2020 – equities will continue to outperform bonds and international equity returns will exceed those for North American equities.