End of Year Market Update 2019

The performance of equities and bond markets in 2019 have been one of the best in decades, resulting in double-digit returns for both Balanced and Growth portfolios for the last 12 months. There are several reasons for the stellar performance, including:

• A lower starting point after a sharp contraction between October & December 2018;
• Continued accommodative policies (i.e. reducing interest rates) of global central banks and the associated fall in bond yields (which causes the value of bonds to increase in price and positive for companies with high debt);
• Momentum from passive investment inflows (more money flowing into last year’s winners);
• Continuation of high dividend payouts and share buybacks; and
• The frantic search for yield by investors via investments other than cash.

Throughout 2019, global equity markets were driven by the weight of money seeking an adequate return as central banks signalled a lower-for-longer interest rate outlook. In the US, the corporate sector rained cash on shareholders at record levels by way of increased dividends and share buybacks, which supported share prices. Passive investment inflows added to demand and algorithms did the rest.

Given the elevated level of uncertainty, as the trade war between the US and China escalated, it was not unreasonable for management to shy away from investing. They effectively decided to put their businesses on care and maintenance, particularly those in the manufacturing sector. This diversion of cash and the continued growth of passive investment strategies pushed share markets to record levels despite widespread uncertainty and volatility.

Now central banks find themselves in a real bind. They are currently administering painkillers to global economies, by way of lower interest rates and quantitative easing, buying time while they figure out a cure. In the meantime, markets may continue to move higher, but a repetition of 2019 is highly unlikely.

Providing an insight into the volatility of the past two years, the S&P 500 index (top 500 companies in USA) is up 17% compared with annual average of 8.5%; and the S&P/ASX 200 index (top 200 companies in Australia) is up 11% compared with annual average of 5.5% p.a. (Source: Morningstar)

Clients who persevered with the average returns of last year (although they were still in positive territory overall) have more than benefited this year.

It is unusual to have equity markets and bond markets perform well at the same time. Hence my caution for next year. That doesn’t mean we should all run for the hills, but it just means we may need to look at increasing our cash reserves or adjusting our portfolios slightly. Any volatility will signal a buying opportunity for those with excess cash, however for others it will mean sticking to your overall strategic asset allocation and maintaining your focus on your long-term goals. All portfolios managed by Prudentia Financial Planning have investments/managed funds that can whether the storm and take advantage of lower prices if and when they present themselves and annual portfolio re-balancing can aid this process.

Remember, price is what you pay, value is what you get.

Wishing you a wonderful Christmas and a happy and prosperous 2020!