The strong price gains of the past year delivered an outstanding return for quirion clients. Now investors are hoping for a similarly good 2020. We show how to interpret developments on the capital markets.
A year ago, only very few expected that 2019 would turn into such an exceedingly pleasing year for investing. Some pundits had already taken the weak December of 2018 as an occasion to prophesy a horror year and to conjure up the next global economic crisis. The year was indeed marked by uncertainties from the tariff disputes, the European elections and the Brexit debates, yet all of this left the global equity and bond markets unmoved. They closed 2019 with exceedingly pleasing price gains.
A vintage year for equity markets
The markets — as measured by the widely followed MSCI World equity index — last looked this robust ten years ago, that is, in 2009. Even better years occurred only five times over the past 50 years. This extremely positive result was also reflected in quirion's asset management. A portfolio with 100% equities was able to achieve an increase in value of 25% in 2019. However, investors who hold 100% equities in their portfolio also accept a high price and market risk in order to be able to achieve a very high return. With foreign equities, country, transfer and currency risks come into play as well.
A surprising comeback for the bond markets
The bond markets, too, offered a return that was unexpected for many investors — markets that, because of the extremely low interest rates at the start of 2019, many investors regarded as stale and unpromising. Over the course of the year, bond yields then fell back to levels never thought possible and, in return, produced sometimes substantial price gains. High-yield securities were able to gain 6% in value, and long-dated government bonds around 4.5%. Even low-risk bond positions rose by nearly 1% in some cases. Overall, despite a slight loss in the final quarter, the bond portion of quirion's asset management achieved an increase in value of about 3% over the year.1
Long-term, forecast-free investing pays off
These successes in the past year clearly show the advantage of a forecast-free set-up, which benefited from the friendly developments on the global equity and bond markets from the very first day of the year. The year just gone proved once again how difficult it is, for instance, to beat the market return ("buy and hold") through targeted entering and exiting ("timing"). Consequently, very few investors are likely to have succeeded in exiting in good time before the stock market downturn in the fourth quarter of 2018, only to then catch the upswing again right at the start of 2019.
Even if it is a truism that the future — including on the investment markets — cannot be predicted, it is nonetheless worthwhile to make sense of connections in hindsight and thus to prepare oneself in advance, in one's thinking, for possible scenarios and imponderables. Or, as Pericles put it: "It is not about predicting the future, but about being prepared for it."
A high bar for equity markets
Right at the start of the year, the German equity index reached an all-time high of 13,615 points. The strong lead from the old year, however, also represents a burden for the equity markets — many shares are now regarded, in light of the classic valuation parameters of the price-earnings and price-to-book ratios (P/E and P/B respectively), as no longer quite cheap. Investors therefore have to hope that in the new year the equity markets will be supported by a stabilisation of the economy and that, as a result, the decline in corporate earnings will be halted. Grounds for (cautious) hope are provided by the latest developments in the trade conflict between the United States and China. Whatever political and economic developments the year 2020 may hold in store for us, a long-term look back shows that most years end positively on the equity market. Equity markets develop astonishingly independently of the economic cycle, as research has clearly shown. A further vintage year like 2019, however, may be considered unlikely.
Bonds as an anchor of stability in 2020 too
On the international bond markets, the environment of low, zero and negative yields is likely to persist in 2020 as well. The generally subdued economy does not suggest that interest rates — and hence bond yields — will rise noticeably. Bonds, however, remain indispensable as an anchor of stability in a portfolio.
Conclusion
Despite the high bar set for performance in 2019, we look ahead with confidence. Regardless of economic forecasts, equity markets tend to rise. We therefore remain true to our fundamental orientation towards a forecast-free and independent investment strategy: in 2020 too, it remains the top imperative for investors to spread equity investments broadly in any case and to align them with their individual risk-bearing capacity. And bonds, despite the rather muted outlook, remain an indispensable component of a portfolio — thanks to their special characteristics — for stabilising a broadly diversified portfolio.
Would you like to learn more about quirion's forecast-free approach and find out how we construct our broadly diversified portfolios? We explain our investment concept and our product selection process in detail in our white paper.
