- Quarterly investor insight
- 10 minute read
Reflecting on 2019
2019 has been an excellent year for market returns, with most of the asset classes in which we invest being strongly positive. In some respects, this year has over-delivered, making up somewhat for the negative returns of 2018, but also making us more cautious as we look forward to 2020.
This year has also been characterised by volatility: we saw sell-offs in both May and August of around 6%. However, if we compare 2019 with 2018 – when markets experienced corrections of first -8% and then -18% – movements have been far more subdued.
What makes this year so unusual is that both strong returns and relatively subdued volatility have come at a time when economic growth around the world has decelerated, bond yields have declined and investors have been concerned about the rising risk of recession.
What has moved markets higher?
Markets have been buoyed by the hope that politicians, by resolving issues which have hitherto weighed on growth, may reverse or assuage the declining economic trend: trade tensions in the US, Brexit in the UK and rising geopolitical tensions, to name a few. Central banks have also committed to increase liquidity injections to keep growth on track; in the words of US Fed Chairman Jerome Powell, we will continue to pursue actions which ‘sustain the expansion’. Hence, a glimmer of clarity around policy and a concurrent improvement in economic and earnings growth ahead have helped to drive markets higher.
Looking forward, we believe that developments in policy uncertainty versus investor expectations will continue to cause both periodic optimism and pessimism, fuelling volatility. There is a risk that these policy woes are not resolved and central bank activity does not halt economic deceleration. However, as we look ahead to 2020, our base case is that economic growth improves somewhat, still providing
a constructive environment for risk assets.
In this environment of multiple outcomes and uncertain timing, we think a prudent strategy is warranted. We are neutral in equities, conservatively positioned in bonds and adding to alternatives, which we believe can provide ballast and further diversification. The good news is that we are not alone in our cautious outlook. Investors pulled $60 billion out of shares in the third quarter, the most since 2009. In contrast, inflows into bonds were +$118 billion. High levels of risk aversion can be a positive sign for risk assets.
Read the full Investor Insight where we elaborate on these themes and our current positioning.
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