How prescient were our market pundits’ predictions for 2019? Tom Bailey revisits their January forecasts.
This article was written in early November for the December edition of our print publication. Therefore, figures concerning market performance in 2019 may be out of date.
One of the biggest surprises of 2019 was the continued strong performance of US equities. Although the year started on a gloomy note, the S&P 500 index broke its all-time-high record several times, most recently on 7 November when it peaked at 3097. The US market has seen share price growth of more than 20% in the year to 7 November. Its total return in sterling was also about 22%.
This was not the outcome expected. In the third quarter of 2018, when our experts made their predictions for 2019, the US market looked wobbly. At the time one expert, Luca Paolini, chief strategist at Pictet Asset Management, predicted that “US stocks should end 2019 in the red”. He argued that the US market was the most expensive in the world and that this situation would not last.
Kelly Bogdanova, portfolio analyst at Royal Bank of Canada, was less pessimistic. She predicted modest share prices rises for US markets in 2019. She said: “Year-on-year comparisons with 2018’s white-hot growth rates will be challenging. But we think S&P 500 earnings can grow at a rate of mid-to-high single digits because of the strength in the US economy.”
Of course, neither expert could have predicted that the US market would suffer a major decline in December 2018. As a result, the US market entered 2019 at a significantly lower level than it stood at when they produced their forecasts for 2019.
Paolini and Bogdanova may have been a little off the mark, but it would be unfair judge them as having been wrong. Paolini predicted a major pullback in US equity valuations, and that pullback took place a few days before the start of the new year. Similarly, returns in the year to date have been significantly above what Bogdanova anticipated, but this is due to the US market starting 2019 at a markedly lower level than it was at when she made her predictions.
The US market was relatively volatile in 2019, but not for the reasons some investors expected. Mark Sherlock, head of US equities at Hermes Investment Management, anticipated volatility on the back of US Federal Reserve monetary tightening. Stocks, he said, would suffer from “concerns about the timing and pace of interest rates rises, and the effect a reduction in liquidity will have on asset prices and company earnings”. In reality, much of the volatility in the US market came off the back of the escalation of Donald Trump’s trade war with China.
Sherlock was not alone in expecting central bank interest rate rises. Peter Westaway, chief economist and head of investment strategy at Vanguard, also believed that the Federal Reserve would continue tightening into 2018 until mid-year. But the Federal Reserve had reversed course by January, with its chair, Jerome Powell, communicating a more dovish message to markets. That softer line eventually culminated in three rate cuts – including an initial cut that was the first since 2008 and the onset of the financial crisis.
In the final analysis, the expected dominance of large-cap US tech stocks did not pan out. Aneeka Gupta, associate director of research at WisdomTree, said: “We remain cautious following the recent tech sector sell-off, and favour more defensive sectors such as healthcare, utilities and consumer staples.” Again, in actuality, a tech sector sell-off did come to pass, but in the final month of 2018. The S&P 500 Communication Services and Information Technology index has delivered a total return of 30% in the year to date.
FTSE holds on
Over the past three years the most common view among experts at the start of each year has been that the UK market is cheap, thanks to continued Brexit uncertainty.
Alex Wright, manager of the Fidelity Special Situations fund, pointed out that the UK market was trading at an average price-to-earnings ratio of 12 times, compared with 14 times for continental Europe and 17 times for the US. The general consensus was that, as long as a no-deal Brexit was avoided, the market could be expected to rise.
Meanwhile, David Coombs, head of multi-asset at Rathbones, said he had been buying FTSE 100 ETFs in recent times because he believed the index provided a good hedge for a Brexit with or without a deal. He said: “If the decision is disappointing, sterling is likely to fall, which would make the FTSE 100 more valuable in sterling terms, given the high overseas earnings of FTSE 100 companies. But if the result is one that brings a measure of certainty, we think it should lead to foreign investors returning to the UK market.”
Despite the political turmoil in the UK and the succession of a new prime minister, the country has about as much clarity on Brexit as it had at the start of the year. At the time of writing in early November, the UK is heading for a general election. A no-deal Brexit appears to be off the table for now, but UK politics has repeatedly shown itself to be highly unpredictable. However, anyone who followed our experts into the FTSE 100 expecting Brexit clarity this year won’t be too disappointed with the total return of 14.7% that the index provided.
Some joy in Japan
Japan is often tipped as poised to return to favour, as it was in our experts’ forecasts for 2019, and sterling investors who put their money into the Japanese market at the start of the year have not been disappointed in absolute terms: in the year to date the MSCI Japan index produced a total return of 16.6% and the Nikkei 225 rose by 16.5%, on a sterling basis. That said, the Japanese indices underperformed the MSCI World index, which returned 20.6%.
Small- and medium-cap Japanese firms were also tipped to do well. Jasper Koll, a senior adviser at Wisdom Tree, said: “2019 is poised to be a good year for Japanese risk assets in general and Japanese small-cap equities in particular.” In the event, neither small-nor mid-cap indices outperformed Japan’s general index.
Koll also predicted that large-cap stocks in particular would be at risk should the US-China trade war escalate and the global economy slow. Paolini voiced similar concerns. He said: “Japan’s overall market is highly dependent on global economic fortunes, and as much as 64% of Topix index earnings depend on overseas sales.”
However, despite much talk of threats to global growth throughout 2019 and several IMF warnings about risks to growth, large Japanese companies continued to perform relatively well, marginally outperforming their smaller counterparts in sterling terms.
Mixed year for China
Our experts’ predictions for China were, on balance, more right than wrong. Most expected Chinese economic growth to continue at a reasonable rate and dismissed fears of a hard landing for the Chinese economy.
Ewan Thompson, head of emerging market equities at Neptune (since acquired by Liontrust), said: “We expect 2019 to be a year of moderation and recovery. We would not anticipate much further slowdown without it being met with significant economic stimulus.”
Paolini took a similar view. He said: “Investor pessimism toward the world’s second-largest economy looks hard to justify at a time when Beijing is supporting growth.” He emphasised that China’s stock market was “the best value among its regional peers, with a 12-month price/earnings ratio of 10 times”.
Chinese stocks did start off the year strongly, with the MSCI China flying ahead of the MSCI World index. By May China was one of the world’s best-performing markets, with the MSCI China index producing a total return in the year to date of around 20%, in sterling. From May onwards, however, it fell behind the global index, as China’s trade war with the US escalated. Jay Roberts, head of investment solutions at Royal Bank of Canada, anticipated that escalation. He pointed out that the trade dispute had become “a larger struggle over national security, underpinned by ideological differences”.
At the time of writing, it appears that a trade deal may soon be achieved, but incidents such as banning the sale of certain technology components to Chinese companies and the US government’s labelling of China as a currency manipulator tend to confirm Roberts’ judgement.
Emerging market hopes
Our experts had high hopes for emerging markets. The sector had just experienced a painful sell-off, but market valuations were deemed to be at historic lows and surely poised to rise. Gupta noted that emerging market assets were at “the lowest valuations among major asset classes globally”. George Lagarias, chief economist at Mazars, said: “We wouldn’t be too surprised to see better performance.”
Thompson argued that an expected weaker dollar should support emerging market equities. He said that while “the trajectory of the dollar is difficult to predict over the shorter term” – as the US economy cooled off and other economies saw a pick-up in growth during 2019 – the dollar would lose ground and the performance gap between the US and the rest of the world would narrow.
Instead, the dollar failed to weaken significantly and emerging markets were further hampered by the US/China trade war. But despite these headwinds, the MSCI emerging market index put in a decent showing, returning 13% in the year to date, though it underperformed other major sectors.
Several commentators expected gold to be favoured by investors in 2019, in expectation that the market turbulence at the end of 2018 would continue into 2019. Instead, equities continued to perform well throughout the year, despite some volatility.
Nevertheless, anyone who had listened to the bearish advice to buy gold for protection would not have been disappointed. Investors flocking to the perceived safety of gold pushed up prices. Since the start of the year, gold, as measured by iShares Physical Gold ETC GBP, has returned 14.8%, roughly in line with the performance of the MSCI World index over the year.
Headwinds holding back returns in Eurozone
James Bateman, chief investment officer for multi-asset at Fidelity International, identified Italy’s budget dispute with the EU as a big upcoming risk in Europe at the start of the year.
That turned out to be the case – up to a point. Over the year, the EU and the Italian government – then a coalition between the anti-EU Lega Nord and the populist Five Star Movement – argued about spending rules. However, by September the coalition had fallen apart and the Five Star Movement has gone on to form a coalition with the pro-EU Democratic Party. By October 2019 Italian bond yields had fallen from around 3% to about 1%.
The big story for Europe this year, however, has been its weakening economic outlook, thanks largely to a slowdown in China, as predicted by James Rutherford, head of European equities at Hermes. He said: “The potential for a full-blown US/China trade war has affected the region more than perhaps any other developed region.”
Broadly, the outlook remains weak. Industrial activity in Germany has slowed significantly, forcing the European Central Bank to further loosen monetary policy. This helped push eurozone bond yields down to record lows (and prices up to record highs), an outcome most market commentators missed.
Sector calls were off the mark. Paolini predicted: “Investors should be able to uncover opportunities in sectors such as financials, and in cyclical industries where valuations have improved, such as energy.”
In the year to 28 October, the Amundi MSCI Europe Energy ETF produced a total return, in sterling, of 7.4% and the iShares MSCI Europe Financial Sector ETF returned 15.2%, underperforming the MSCI Europe index, which returned 18.7%.