Axiome December update 2019

What a difference a year makes!  At the beginning of 2019 equity markets were treading water following a 15% decline over the end of 2018.  Our view at the time was that markets were over-pricing economic recession risks, and the best course of action was to remain fully invested.  We did not, however, expect that the year would close with equity, property and infrastructure returns of 25% or more in many markets!

Over the year economic growth and corporate earnings did in fact materially weaken as the trade war took hold (figure 1), but what is key for markets is how this compared to what was expected.  Much of the bad news in 2019 was concentrated in business confidence surveys and global manufacturing and trade.  The fear was that this would spill-over into the rest of the economy, in particular denting the services sector, employment, and household spending in key economies such as the US, the Euro Area and China.  But to a large extent this didn’t happen.  The services sector remained robust, and unemployment rates have remained exceptionally low in New Zealand, the US, the UK and most other OECD nations.   As such, household spending and investor confidence remained high.

Instead, what clearly did happen in 2019 was a reversal by central banks – from tightening to easing interest rates and monetary conditions (figure 2).  This was likely by far the single most important reason why asset class performances, across bonds (defensive assets) and equities (growth assets), were so strong in 2019.