Global stock markets shook off recession fears and geopolitical and trade risks last year to end the year almost a third higher in key developed equity markets, with the MSCI World Index, which represents 23 developed markets, rallying 24%.
These impressive investment returns were achieved in a market environment in which volatility, as measured by the CBOE Volatility Index, remained at relatively low levels in the face of waxing and waning recession fears and US-China tensions.
The US stock market benchmark indices, the S&P500 and Dow Jones Industrial Average, powered to successive record highs during the year, ending 2019 28.7% and 26.4% higher respectively. Technology stocks led the charge, with the Nasdaq notching up a 34.6% gain for the year.
The decade-long equity market expansion has been the longest on record. Since it began in 2009, stock markets have not pulled back by anywhere near to the 20% decrease that would represent a bear market. To a large extent, this bull market has been powered by lower interest rates after central banks around the world took far more dovish stances, reducing interest rates and, in the case of the US and Europe, reinstated quantitative easing programmes, than expected at the beginning of the year. Despite the uncertainty that predominated as a result of the trade war, US consumers also kept on spending and job growth remained robust.
Other advanced economies also experienced relatively strong stock market performance. Canada’s S&P/TSX Composite Index put in its best performance in a decade, gaining 18%. The Japanese Nikkei Index had its best year in almost three decades, advancing 18.2% after falling 12.8% during 2018. The FTSE 100 managed to deliver double-digit returns of 12.7% during a year when Brexit uncertainty dogged investor sentiment. Germany’s Dax increased 25.5% and the Europe-wide Stoxx 600 ended 2019 up 23% ahead.
In the emerging market universe, China’s CSI 300 Index soared 37.9%. Emerging markets also gained impressive ground during the year. The MSCI Emerging Market Index rose 15.8%; a strong result but one that lagged the buoyant performance achieved by developed market stock markets.
US trade tensions hold centre stage
US-China trade tensions dominated the headlines for much of the year as senior trade delegations sought to put together a trade deal but left the negotiating table on several occasions. Agreement on a Phase 1 trade accord was achieved just days before the last round of trade tariffs were due to be imposed by the US on Chinese consumer goods on December 15. The 80-page agreement is expected to be signed by both parties in January and commits to the roll back of some of the tariffs imposed by both parties to date. China has also committed to buy agricultural goods, as well as making strides in protecting US intellectual property and removing the requirement for US companies to share their trade secrets when operating in the world’s second largest economy.
Soon after the trade deal announcement, US President Donald Trump said the two countries would immediately begin working towards a Phase 2 trade deal but this is expected to be more difficult to achieve given some of the bigger structural changes the US wants to see implemented by the Chinese Communist Party before a deal is likely to reach fruition.
On-off recession fears impact on investor confidence
Global economic recession fears, which predominated during the third quarter, fell into abeyance in the fourth quarter as the world economy got onto a more even footing and global consumption continued to underpin economic activity.
In the US, the jobs market remained strong. Non-farm payrolls increased 266,000 in November, and unemployment came in at a low 3.5%. In contrast, Canada saw jobs decline 71,200 in November, the second consecutive month of job losses after October’s 1,800 decline. These figures were well below expectations. On a positive note, however, average employment growth during the year remained positive, with 26 000 jobs a month created during 2019.
Manufacturing in Canada, which has been strong until recently, is now experiencing the slowdown that has been afflicting countries such as Germany. Germany entered industrial recession in October when it experienced its deepest downturn in a decade, while Canada saw the manufacturing sector decline 1.4% during the same month, partly as a result of the United Auto Workers’ strike. GDP contracted 0.1% during October versus a 0.1% increase the previous month. Rating agency, Fitch, expects Canadian growth to come in at about 1.7% during 2019.
Japan’s economy has been stumbling in the face of the US-China trade war and its impact on global trade volumes, as well as a slump in local retail demand in the wake of government’s sales tax increase to 10% from 8%. However, the Japanese government has put together a $122 billion fiscal package stimulus package to buoy the economy and counter slower global demand.
In the UK, the Conservative Party achieved a resounding victory in the elections. Prime Minister Boris Johnson was quick to assert that the UK would go ahead with Brexit by the January 31 deadline regardless of whether it had achieved an exit deal with the European Union.
Monetary policy easing proliferates globally
Central banks around the world continued to ease monetary policy during 2019. The US Federal Reserve did a U-turn on imposing rate increases as anticipated at the beginning of the year and proceeded to reduce interest rates three times by the end of the year. This set the tone for the rest of the world, with both advanced economies and emerging markets cutting interest rates in an effort to reboot growth.
In Canada, after keeping interest rates on hold at 1.75% in December, Bank of Canada Governor Stephen Poloz announced that he would be stepping down in 2020, in a move that was widely expected. The Bank announced it was looking for a successor, with Carolyn Wilkins reportedly a front runner.
Both the Federal Reserve and the IMF have commented on the worrying state of public and private sector debt and the vulnerability this introduces to the world economy in the event of a global crisis. In December, the IMF published global debt statistics for 2018 that showed that total global debt amounted to $188 trillion by the end of 2018, $3 trillion higher than the previous year. The global average debt to GDP ratio stood at 226% at the end of 2018, 1.5 percentage points higher than the previous year.
It calculated the public debt ratio to be higher in 90% of advanced economies than it was before the 2008 financial crisis. Meanwhile, US corporate debt reached a record high by the end of 2018. The IMF expressed its concern regarding the increasing use of debt for financial risk taking, including funding dividends, share buybacks and merger and acquisition, and the issuance of highly speculative grade debt.
OPEC underpins oil price and Aramco IPO
In the oil market, the Brent Crude oil price was supported by OPEC cuts, trading in a range of $50 to $75 a barrel during the year. At its 7th Ministerial meeting, OPEC members agreed to deepen production cuts by reducing output by an additional 500 000 barrels a day until March 2020. The cuts are intended to counteract the potential oversupply in the first quarter as a result of lower seasonal demand and a slowing world economy.
The much-anticipated Saudi Aramco Initial Private Offering went off successfully in early December after several delays. At $1.7 trillion, it was the biggest share offering ever. By the second day of trade, the listing valuation increased to $2 trillion before retracing slightly but still ending the year 0.4% ahead of its listing price.
The IPO proceeded despite the world’s largest oil exporter being exposed to Iranian drone attacks on its production facilities, US scepticism about its valuation and climate concerns. The IPO was five times oversubscribed, with demand of $100 billion versus the $26 billion on offer.
While we can’t predict with any accuracy where markets are headed in 2020, we are well aware that the variables that led to last year’s astounding stock market performance are likely to change in the coming periods. Job creation will slow and corporate earnings will weaken at some point and this business cycle will end, as is the natural path for the economy.
As I’ve said before, it always ends with credit and right now that is becoming a bigger concern for central banks, including the Bank of Canada, who are reluctant to cut rates for fear of encouraging more borrowing by debt-laden consumers.
However, we remain steadfast in our quest to unearth quality investment opportunities for our clients and look forward to another successful year in 2020.
Garnet O. Powell, MBA, CFA is the President & CEO of Allvista Investment Management Inc., a firm with a dedicated team of investment professionals that manage investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 20 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca