Against expectations, 2019 has proved a year in which it was tough not to make money. The rising tide of central bank policy floated all boats.
- 2019 was a ‘risk on’ year where the question was not whether an investor made money, but how much.
- A 60/40 equity bond portfolio would have produced good returns, but 2020 is likely to bring more complexity.
- Around 30% of the bond market currently on negative yields.
If investors needed reminding of the futility of looking at the macroeconomic environment as a guide to asset allocation, 2019 was proof. Equity and bond market performance defied weakening economic statistics with no single sector in negative territory for the year to date.
It was a ‘risk on’ year where the question was not whether an investor made money, but how much. And here, the difference was stark. While funds in the Technology, North America and North American Smaller Companies sector saw average gains of 20%+, those who held faith with Emerging Markets saw an average return of just 11%. Direct property was only just in positive territory with an average 0.2% return.
The trigger, once again, was the Federal Reserve and to a lesser extent the European Central Bank. As money flowed round the system once again, it found its way to the usual suspects – technology and other solid growth companies – driving markets higher. There was some resurgence of value in the final quarter of the year, but more of an ‘even fight’ rather than a wholesale change.
It is difficult to see how this can continue to sustain markets from here, however. If 2019 made investment look easy – a 60/40 equity bond portfolio would have done the job nicely – 2020 is likely to bring more complexity.
First there is the bond problem. Around 30% of the bond market currently on negative yields. Rob Burdett, co-head of multi-manager at BMO Asset Management, recently pointed out that as it stands, there isn’t a single UK gilt that would deliver a return above inflation if held to redemption. Relying on selling negative-yielding bonds to the ‘greater fool’ is no basis for an investment strategy.
There’s also the differentiation problem. Equities continue to move based on macroeconomic factors without investors paying a lot of attention to fundamentals. This trend has been easy to play through index funds as it has tended to benefit the largest companies in the index, particularly the US. At some point, this is likely to spring back, with value emerging in areas such as smaller companies.
While a straightforward blend of equities and bonds has served investors well in 2019, it is difficult to see them being able to repeat the same trick in 2020. Central banks are running out of ammunition, which may require investors to take a more nuanced view.