2019 saw strong performance across both equities and fixed income and the year turned out to be a much more positive period for markets than many commentators predicted. Equities ended the year up significantly after a strong Q4. The MSCI World returned +8.2% for the quarter bringing performance to +25.2% for the year. In contrast with the rest of the year, emerging markets outperformed in Q4 with MSCI EM rising 11.4% against the S&P500 8.5% and Eurostoxx600 8.9%. The stand-out performer in FX was GBP, which rallied with the conclusive victory of the Conservative Party in the UK general election. After the inversion of the US 2/10 yield curve in Q3, curves steepened. Gold rose 2.9%.
2019 has seen a reversal of monetary policy, particularly in the US. 2018 saw some first steps in monetary tightening and the prospect of that continuing led to the market turmoil of Q4 2018. That policy has been firmly reversed. From forecasting further rate rises in 2019, we actually saw 3 rate cuts, with the market currently pricing in an additional 1 to 2 cuts in 2020. This has allowed the discount rate for many financial assets to fall and hence we saw the (perhaps surprising) strong performance of equities as economic data worsened. This is much to do with monetary policy driving asset prices; S&P500 companies have seen no increase in corporate earnings and virtually of the market rise was through rerating of shares.
Given the market reaction to tightening in 2018, any pre-emptive tightening by central banks this cycle seems unlikely. Jay Powell, the Fed Chairman has said that there would need to be a sustained increase in inflation to lead to any increase in interest rates. There has also been further injection of liquidity into the market; in October, the US Federal Reserve announced it would begin buying T-bills at a rate of USD60bn per month, continuing purchases through Q1 2020. As a result, in just 6 months, the Fed’s balance sheet has grown back to the level at the end of 2018. We are back at peak central bank holdings and a significant inflow of liquidity into the system.