Market review: the lessons we can learn from 2019

Andrew Milligan

In his last market review of the year, we asked Aberdeen Standard Investments’ Head of Global Strategy, Andrew Milligan, which events have had the biggest impact on markets in 2019, what’s ending the year on a high and what we can learn for 2020.

Which events do you think had the biggest impact on markets during 2019?

We must start with some of the tweets about trade from US President Trump and statements from Chinese President Xi. Markets have followed the debate about the future trade policy between the world’s first and second largest economies on a daily basis.

At the start of the year, markets seemed quite sure that there would be a dangerous trade war between the US and China, but fortunately from October they’ve been convinced that one is very unlikely. However, the timing of any trade agreement remains uncertain, as both sides look for the other to blink first over the final details. This could affect the confidence of investors as we reach the end of 2019.

Central banks took centre stage at times

Next up are the three interest rate cuts from the US’s central bank, the Federal Reserve ─ in particular the start of the rate-cutting cycle in the summer. This began to convince investors that the Federal Reserve would act to prevent a recession. The rate cuts also took away the risk of a sharp rise in the US dollar that could have hurt many emerging market businesses and governments which rely on overseas investment.

Other central banks made important decisions this year. For example, the European Central Bank adopted a quantitative easing policy again in the autumn, despite opposition from some of its governors.

On the flip side, markets had expected rather more support from the Chinese central bank to bolster the slow-growing Chinese economy. Instead, as new financial problems appeared, the government decided to take a series of small steps to ensure stability.

Closer to home, Brexit has dominated the headlines

There was a small risk over the year of a disorderly Brexit from the European Union. But the autumn votes in Parliament showed that the UK would look for some sort of agreement. As a result, the pound steadied against other major currencies and investors showed some renewed interest in UK assets.

A strong year for the technology sector but manufacturing has struggled

Although overall the profits of many companies represented on US stock markets stagnated in 2019, certain sectors such as technology did much better. The general ability to grow revenues was helped by more signs that demands for data centres and business software remained strong. Areas such as 5G, smartphones and semi-conductors also all looked more positive, and that looks like it will still be the case going into 2020.

With weaknesses in the manufacturing sector spreading to many countries, there were growing concerns about a global recession. But as we get towards the end of the year, investor confidence has recovered, with generally better outlooks for businesses in the US and in other countries as a result of interest rate cuts, tax cuts and government spending.

Which investments and markets are ending 2019 strongest?

One of the interesting phenomena of 2019 was that it was a year when both equity and bond markets did well ─ much better than property markets and cash-type investments. Both were driven by the same factors, namely lower interest rates and a return to quantitative easing, especially by the US and European central banks. Equities are now pulling ahead of bonds a little as we move towards the end of the year, with investors expecting some better news on the US-China trade front.

Europe has been one of the year’s surprise success stories

In terms of countries, US stock markets did quite well, and European stock markets bucked expectations as investors looked ahead to better times in 2020. Maybe unsurprisingly, political uncertainty has held back UK equities, while Chinese equities have suffered from some poor profits growth, and Japan from the rise in the value of the yen against other currencies, plus concerns about the impact of a major tax increase in the autumn.

Emerging markets have had a year of two halves. In the first half of 2019, worries about trade held them back before investment began to flow into emerging markets again as investor confidence returned.

And finally, what lessons can we learn from 2019?

The first goes back to the initial point I made in this article. Of course politics do matter, as shown by the concerns about President Trump and trade wars. But there’s a danger of paying too much attention to daily announcements and tweets from political leaders. At the end of the day decisions by central bankers were more important.

We also learnt that markets don’t always have to be overly volatile

Following a turbulent 2018 for markets, 2019 has been much calmer. Yes, there have been some ups and downs in response to political and economic events, but nothing like the substantial falls in the last few months of last year. That said, insurance against volatility is still useful, which is why many fund managers have been more defensive in their approach to investing this year.

And central bank policies do have an influence

It’s worth emphasising again that 2019 has been a year when the importance of central banks’ monetary policy has been very clear. Many investment commentators expected interest rates to be static or perhaps even rise. But as I’ve already mentioned, as recession fears rose, the US Federal Reserve cut rates. This was mirrored by rate cuts in other major economies ─ China, Europe, India and Russia to name a few.

And going into 2020, the prospect of a global recession does appear to have receded. The next question to answer in 2020 will be whether governments can provide extra support through tax cuts and spending increases to bolster the global economy.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.

Information is based on Aberdeen Standard Investments’ understanding in December 2019.