The Year in Review – Hindsight vs Foresight

The year 2019 served up many examples of the unpredictability of markets.

The RBA expected the cash rate to stay steady or rise, but it fell instead. Sentiment around the residential property market started the year at an eight-year low with the prospect of potential changes to negative gearing on the horizon.1 Australian consumers’ confidence weakened as the year began,2 and news headlines broadcast fears of an economic slowdown. But investors who moved onto the sidelines may have missed the big gains in the Australian stock market. As of the end of 2019, the S&P/ASX 300 Index was up more than 23% for the year on a total-return basis – its best showing since 2009. Australian housing prices also rallied and are on track to post a positive gain for the year following reductions in the RBA cash rate, no changes to negative gearing policies and a loosening in loan serviceability policies from APRA.3

Exhibit 1: Shifting Curves
Yields on US Treasuries of various maturities since the end of 2018

Source: ICE BofAML fair value government spot yield. ICE BofAML index data © 2019 ICE Data Indices, LLC. Note: Measured in USD.

“The Greek stock market swung from a 30% decline last year to a 40% advance this year.”

Outside Australia, Greece—the site of an economic crisis so dire some expected the country to abandon the euro earlier this decade, and a country whose equity market lost nearly a third of its value last year—has had one of the most robust stock market performances in 2019. On top of that, Greece issued bonds at a negative nominal yield, which means investors paid for the privilege of lending the government cash.

Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors.

Up or down?
A closer look at interest rates and bond markets around the world shows just how unpredictable asset performance can be. Going into 2019, the RBA expected no near-term adjustment in monetary policy, with the next move likely to be an increase in the cash rate.4 Instead, the RBA cut the cash rate three times throughout the year. It was a similar story in the US, with Federal Reserve officials expecting to raise rates, but instead lowering them three times.

Globally, we have seen bond yields fall. In some markets, yield curves inverted (where long-term yields fall below short-term yields), including the US Treasuries market, which inverted for the first time in more than 10 years, as seen in Exhibit 1. Moreover, yields on medium- and long-term bonds were at historically low levels at the start of the year, but they fell even lower by the end of the 2019 year. Investors who moved to cash based on the expectation yields would rise in 2019 may have been disappointed with how events ultimately transpired, with global bonds returning 7.19% for the year to Dec 2019 while bank deposits earned less than 2% interest.5

Exhibit 2: Changes in the Ranks
Performance of equity markets in 23 developed economies

Source: MSCI country indices (net dividends) in AUD for each country listed. MSCI data © MSCI 2019, all rights reserved.

Trading places
Events weren’t any easier to anticipate in the global equity markets, where no evident link appears between markets that performed well last year and those that have excelled this year, as Exhibit 2 shows.

Among the 23 developed market countries,6 only one country was a Top 5 performer for 2018 and 2019: the US. 2018’s strongest performing market—Finland— was 2019’s worst performing market. Among emerging markets, Greece swung from a 30% decline last year to a 40% advance this year through the end of October.

Perennial Wisdom
Careful research of historical returns has shown there’s no compelling or dependable way to forecast stock and bond movements, and 2019 was a case in point. Neither the mainstream prognostications nor recent hindsight predicted outcomes in 2019.

Of course, we don’t know whether this will continue. Markets change as news changes. But it does offer a reminder about the risks involved in setting your investment strategy according to the headlines of the day. If you had acted on last year’s gloomy commentary, you would have missed a year of substantial gains in shares.

Rather than basing investment decisions on predictions of which way debt or equity markets are headed, a wiser strategy is to seek advice and ultimately hold and regularly rebalance a range of investments that focus on systematic and robust drivers of returns. Investors who were broadly diversified across asset classes and around the globe were in a great position to enjoy the returns that the markets delivered in 2019. Last year, this year, next year—that approach is a timeless one.

What do you think?
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1. Based on readings from the NAB Residential Property Index for Q4 2018.
2. Based on readings from the Westpac-Melbourne Institute Index of Consumer Sentiment.
3. Janda, M 2019, ‘Sydney, Melbourne house price surge accelerated in November’, ABC News, 2 Dec. 2019.
4. Based on the December 2018 Minutes of the Monetary Policy Meeting of the Reserve Bank Board.
5. Global bond returns measured by the Bloomberg Barclays Global Aggregate Bond Index (hedged to AUD). Bank deposit interest rates the average of interest rates between Jan. 2019 and Nov. 2019, sourced from RBA Statistical Table F4 – Retail deposit and investment rates; Savings accounts; Banks’ bonus savings accounts; $10,000.
6. Markets designated as developed or emerging by MSCI.

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