Happy New Year and welcome back! It has been a tumultuous time for our country and our thoughts go out to those that have lost homes and loved ones due to the bushfires that have engulfed Australia.
Calendar year 2019 saw most asset classes generate very strong returns with many delivering double-digits returns. Australian equities, as measured by the S&P/ASX 300 Index, returned 23.8%, while global equities, as measured by the MSCI World ex Australia Index AUD, returned 27.6% for the year. At the other end of the asset classes spectrum, bonds also posted strong returns with Australian bonds, as measured by the Bloomberg AusBond Composite 0+ Year Index AUD, returning a solid 7.3% for the year. These returns were generated despite concerns over US-China trade tensions, Brexit, arguably high asset prices and mixed economic news.
A key factor contributing to this market strength has been the fact that interest rates appear to be on hold in the US and possibly heading lower in Australia. This is making investing in growth and interest rate sensitive assets, such as property and infrastructure, attractive when compared to holding your money in cash. Additionally, some of the economic indicators that were trending down, such as the PMI (Purchasing Manager’s Index), seem to have stabilised and the consumer seems to be holding up.
In 2020 we are paying particular attention to three key themes:
Asset classes are generally trading at fair to expensive territory with US equities appearing the most expensive based on most valuation measures. While interest rates are low these valuations may be sustainable in the near term. However, we expect that at some point valuations will come back into vogue. Timing turning points is difficult however on a forward-looking basis our expectation would be that ‘expensive’ asset classes will generate lower returns in the future. Based on this we retain our slightly underweight exposure to equity markets heading into 2020 favoring real assets and alternative assets.
- The cycle
Much has been written about being late cycle and we think that we are at the later stages of the cycle. There are signs that some economic indicators have stabilised, which markets view favorably. Key things to watch in 2020 will be the consumer and household savings rate, which has been rising, and the possible flow on effect on consumption.
Despite strong market returns, 2019 saw bouts of volatility caused by geopolitical issues including the US-China trade tensions. We expect this geopolitical environment to continue in 2020. Furthermore, we have seen geopolitical tensions rise in the Middle East with growing concerns over US-Iran relations. Such events create market uncertainty and market volatility in the short-term.
We wish everyone a prosperous and safe 2020.