06 Dec December 2019 | Economic and Financial Market Update
Written by David Graham, Senior Financial Planner, Mapp Fin CIMA® CFP®
This time last year, equity markets were reaching the nadir of significant correction, with major global share markets falling by double digit sums. At various times in 2019, equity markets looked wobbly. However, markets have generally risen and in a number of cases, made record highs.
On a ‘look through’ basis, we can broadly say it was a successful year for investors. While returns across asset classes varied, they have generally been positive and in many cases, more so than we would have expected.
The major themes of 2019 have been trade wars, recession and interest rates. They are all interrelated. Free trade has been the most significant driver of global economic growth for the past ~30 years. The apparent retreat from this trend has, not surprisingly, created doubt about the future strength of the global economy. Economies have slowed, but whether this is entirely due to trade tensions, or a more generalised ‘mid-cycle slowdown’ is debateable.
GDP is essentially a measure of spending; GDP = Consumption + Investment + Government + Net Exports. Recent data in Australia suggests the latter categories are the only areas of growth. Indeed, growth tends to rotate through these categories over time. This is how we have avoided recession for 28 years. A low volatility economy will generally have both lower peaks and shallower troughs.
Our view is that the economic conditions we are currently experiencing are to be expected and ephemeral. It would help if the Government was not obsessed with a budget surplus. The recycling of old fears for our cherished AAA rating is puerile. The Government has never been able to borrow more cheaply. Nonetheless, we believe the global economy is probably past its worst and will start to rebound next year. This will help us to remain ‘the lucky country’ for a little longer.
Lower global interest rates and less conviction about a global recession, has helped propel equity markets. The lower rates go the more desperate the hunt for yield. There is of course the little issue of risk; an issue we see being increasingly ignored.
Into the void comes the ‘structured product’. On the surface these look like the answer to the yield seekers prayers. I direct your attention to exhibit A; the KKR income fund (KKC). The Initial Public Offering (IPO) for this listed trust was oversubscribed by a factor of 4. It indicated a target return of 6% – 8% p.a. with a target income distribution of 4% – 6% p.a. Attractive right? What is not as clear is that the underlying investments are what is euphemistically termed ‘high yield’ credit AKA junk bonds. This is but one example of new products being created to attract the unwary and imprudent. You need to ‘look under the bonnet’ and see what Is driving the vehicle.
Enough of the abject cynicism! We believe 2020 will be positive for investors. Returns are likely to be lower than this year, as the outsized returns arising from falling interest rates will be absent. Increased economic confidence may nonetheless buoy company earnings and generate higher equity prices. We prefer non-U.S. equities on a valuation basis, but U.S. markets generally do OK in an election year. Whether the clown show in Washington is drawing to an end is another matter. The intolerance of low interest rates will see market corrections quickly rebound as FOMO & FONGO[1]. Thus, expect significant market volatility. Have a Great 2020, anyway.
[1] Fear of Missing Out & Fear of Not Getting Out
Information current as at 5 December 2019.
This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date.