The Year That Was - The Midas Touch in Action (Global)

The article above is Aon's Reflections on 2019 and the Outlook for 2020.


Take the calendar year just completed and marvel at just how well markets did. The S&P 500 returned some 31%, but other equity markets were not outdone by much. Only against the US market’s runaway performance yardstick does the 19% return in emerging markets and Europe’s 26%, appear anything other than very strong. Yes, the US technology sector’s 50% return and Apple’s doubling in 2019 did seem to put much else in the shade, but the relatives here must not obscure the absolute. What is more, other asset classes beyond equities delivered strongly too. Virtually everything made money during 2019 and lots of it.

Demonstrating that this was no ordinary market rally was what happened at the other end of the risk spectrum to equities. Government bonds defied conventional wisdom and produced strong returns too, some of the best risk-adjusted returns in the markets (the US long government index delivered almost 15%). And how about gold, a ‘traditional safe-haven’ which returned about 18% in the year? Amidst some truly extraordinary market conditions last year, other notable features were the way defensives still managed to outperform the cyclically sensitive through this big rally, and the way that value stocks, despite some signs of life in the second half of last year, still failed to claw much lost ground back.

Of course, a moment spent looking behind the numbers shows that taking an arbitrary window like a calendar year can hide some sins. 2018 had been a turbulent year and finished with a big sell-off, so some part of 2019 strength was part relief rebound. This is why taking 2018-19 together shows a rather different picture to just looking at last year in isolation – global equity indices doing about 5% per annum over the two-year period instead of the gain five times larger that appears from looking at last year alone. Even so, credit should be given where it is due, and we cannot take much away from markets pulling off such a dramatic turnaround from what looked a very difficult backdrop at the start of last year.

You do not have to look far to find the reasons for the spirited market comeback. Spooked by the widening trade conflict between the US and China, a rapid freeze of global trade and a deepening global economic slowdown (which could have led to an even deeper market meltdown than that in late in 2018), central banks turned remarkably easy with monetary policy last year. Pre-eminent though the US Federal Reserve’s three rate cuts last year were in market impact terms, the easing trend went far wider. In 2018, 43 central banks had raised rates against 32 that had cut them. Last year, 60 central banks cut rates and only 15 raised them. After such a difficult 2018, this was healing balm to all asset classes, a central bank Midas touch in action not seen on this scale since the aggressive monetary response to the 2008 financial crisis. It revived spirits in very risky and troubled asset markets like equities and high yield, easing fears of global recession. But it energised bond bulls too, who anchored low yield expectations to lower central bank rates and a view that lower rates were more likely to persist.

That equity and bond markets were implicitly taking rather different views on the likely path of economic activity looking ahead, one betting on a rebound, the other on continued weakness, did not seem to trouble anyone very much. The polarisation of views came through in market behaviour, however. Within asset classes and between them, right across the spectrum, trends were simultaneously risk-loving and cautious. Rising markets made this confusion seem benign.

Quite a year, in other words.


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