In 2019, investors were rewarded with one of the best share performances of the decade, to the surprise of many.
In Australia, a shock win in the May federal election returned the coalition government to power. Overseas, protestors and police clashed violently in Hong Kong, demonstrators took to the streets across the globe to demand action on climate change, the Brexit debate escalated and forced a last-minute UK election, and trade tensions continued between the world’s two superpowers.
Investors would naturally think this high level of social and political turbulence would weigh on markets – but in 2019 at least, that wasn’t the case. While economic activity and business slowed, the share and bond markets performed well.
So how did individual asset classes do and what should investors expect for the year ahead?
After the turbulence of 2018 which saw the S&P/ASX 200 drop by almost 7%, 2019 was an outstanding year for the Australian sharemarket. The ASX 200 rose by more than 18%, delivering one of its strongest results of the decade. In total, returns on Australian shares rose by just over 24%, hitting record highs in late November.
CEO of Capital Partners, David Andrew, says there’s anecdotal evidence to suggest investors chasing yield drove up the value of the sharemarket. Because bank term deposits delivered rates lower than inflation, investors increasingly turned to the sharemarket in their search for income.
However, Andrew warns this strategy could have dangerous implications going forward.
“If the earnings aren’t there to support this value, either we’ll have a relatively extended period where sharemarkets won’t go very far at all, or we’ll see them go backwards,” he says. “That’s because the markets cannot get ahead of the company earnings that determine market value for any sustainable period of time.”
Meanwhile, the housing market got off to a shaky start. The number of capital city properties on the market at the end of May was at its lowest since 2012. However, investment lending rose after the election, which put an end to possible changes to negative gearing legislation.
In the second half of the year, loans for first-home owners rose as the RBA cut interest rates three times – in June, July and October. While property prices began to rise again at the end of 2019, a continuing low-inflation and low-interest environment could continue to dampen investment returns in this sector.
Australian bonds returned slightly more than 9% to investors on the back of the central bank cutting interest rates. And global sovereign bonds also performed well, gaining 7.3% overall – despite many international bond markets delivering negative returns.
Overseas shares also performed strongly, adding a staggering A$14.4 trillion for the year. Unsurprisingly, US markets were dominated by the big tech stocks, with the NASDAQ rising almost 32% on the year, driven in part by a doubling in Apple’s share price. In contrast, the energy sector was the worst performer, ending the year 4% lower.
While there’s considerable exuberance in the tech sector, David Andrew says this enthusiasm doesn’t mean all tech company share prices are supported by earnings.
“If there’s a lot of exuberance, our portfolios tend to cushion our clients from that risk because we have an exposure to value stocks,” he explains. “And we also have a profitability filter – so if a company’s share price is going really strongly but they’re not making any money, we will tend to underweight that sector.”
So will markets continue to climb in 2020? The truth is no-one knows. What seems likely is that the unstable global geo-political environment will continue to drive sentiment. Back home, the impact of the devastating bushfire season will likely drag on an already slowing economy.
It’s also worth noting that between March and October 2019, the US market experienced an inverted yield curve, with long-term bond rates lower than short-term rates. In the past, this has been an indicator that a recession is on the horizon.
But as 2019 demonstrated, predicting the future can be tricky. David Andrew emphasises that the key to success is ensuring you have a well-considered strategy in place, created and implemented with the help of professional advice.
“You need to be really clear on what your strategy is – the goals you’re trying to achieve, and what the appropriate asset allocation and investment strategy is to achieve those goals,” he says. “Then, you need to be disciplined around sticking to it.”