My view on the world is there is a lot of noise about nothing and little long term progress in the vital areas needed. You would be right to say that is how it is always, some might say we lack good leadership here and abroad, it seems short-sightedness and self-preservation prevail instead. We need the proverbial benevolent dictator!


  • The share markets in most places have experienced extremely high returns this past year.
  • The gains in these markets don’t appear to be driven by strong economic growth or fundamentals as corporate profit growth hasn’t kept pace with share price gains.
  • Despite this a global recession unlikely in 2020 according to this analysis.
  • It is suggested that the stellar double-digit gains recorded in recent years will not be repeated, however positive returns for 2020 are still expected.
  • There is a lack of attractive opportunities across all asset classes, trying to time the market or pick winners for short term gains is not recommended.
  • As always we believe the best course of action is to remain invested in the market and focus on investing in high quality investment managers with a proven track record i.e. stick to your plan!
  • The IMF reduced our growth forecast today, the implication being that the economy is slowing down.


Below is the market update for December, the last paragraph’s outlook contain sound advice, call us if you would like to have a discussion. Adrian


Markets in review


Major stock markets around the world rallied into the year end, building on the strength of the prior three quarters. Australia was the only market to end the December quarter relatively flat whilst the US, Europe and Emerging Markets saw substantial increases of 4.1%, 3.7% and 6.8% respectively.1

The United States’ S&P 500 convincingly broke through its previous all-time highs that were set in July 2019 and finished the year with a 29% gain in AUD.2 Australian markets ended the year with the S&P/ASX 200 gaining 18%.3 The MSCI Emerging Markets Index gained 15.5% in AUD following relatively poor performance through the first three quarters of the year.4 All returns are based on price indexes which do not include dividends.

The gains in these markets don’t appear to be driven by strong economic growth or fundamentals as corporate profit growth hasn’t kept pace with share price gains. Rather, gains are likely due to accommodative policy supplied by central banks around the world.

The Australian Dollar closed out the year at 70.16 US cents. The performance in the December quarter strengthened due to general United States dollar weakness, recouping some of the declines in the early part of the year.



US and China Trade Deal


US manufacturing output has declined since the trade war between the United Stated and China began in July 2018, as illustrated in the chart below. The ongoing uncertainty from the trade wars has resulted in lengthy delays in manufacturing and hiring. While manufacturing has been weak, US consumer spending and confidence has been strong, supporting global economic growth, making a global recession unlikely in 2020.
There was a positive development in the situation in December, with markets welcoming a Phase One Trade Deal between the US and China. Under the deal, the US will reduce tariffs on Chinese goods purchased, and China will not retaliate with tariffs on US goods. Another feature of the deal were structural reforms.
Structural reforms will include stronger intellectual property protections, China to refrain from competitive currency devaluations and improved access to China’s financial services market for U.S. companies.5
If the signing goes as planned, it will represent the first agreement between the U.S. and China to reduce tariffs since the two countries began implementing bilateral tariffs in July 2018.

Stock markets around the world have warmed to the December trade deal, sending global equity markets higher in both December and early January. With the backdrop of accommodative monetary policy and low interest rates, modest gains in global equities are expected for 2020.



Outlook and Portfolios

Global share markets are looking very expensive after the long bull run since the Global Financial Crisis and particularly given the sensational gains made over the past year. The valuation of the Australian share market is above the long-term average, as illustrated in the chart below.
The weak economic environment and uncertain corporate earnings outlook raise concerns over the ability of equity markets to continue to deliver the strong positive returns investors have grown used to.

From a valuation and fundamental perspective, many investors are now cautious about allocating to equities. We believe the headwinds facing equity markets will make it difficult for the stellar double-digit gains recorded in recent years to be repeated, however we still expect positive returns for 2020.

It is difficult to identify other asset classes with a more positive outlook where we would recommend allocating capital at the expense of equities.

Interest rates are at or near record lows in many regions, as many central banks continue to provide very easy money and experiment with “unconventional” policy moves including negative interest rates and large scale bond purchases. With interest rates at record lows, the outlook for the defensive bond sectors is poor as there are unlikely to be large falls in interest rates in the near term (bond prices move in the opposite direction to interest rates).

Cash and term deposits offer guaranteed safety, however with interest rates at their current lows these assets will not generate the returns required by investors, particularly after fees are considered.

With a lack of attractive opportunities across all asset classes we do not recommend attempting to tactically allocate between asset classes for short term gains. We believe the best course of action is to remain invested in the market and focus on investing in high quality investment managers with a proven track record.


Outlook & portfolios

Share markets have had a phenomenal run since the start of 2019 with major developed markets all gaining over 18% (in AUD terms) and a number of stock market indices flirting with all-time highs. Worryingly, the underlying economic fundamentals do not appear to be supportive of such lofty share market valuations with many major economies facing stubbornly low wage and productivity growth and an uncertain outlook for corporate earnings. Inflation, as measured by the price change of consumable goods and services, has been below the levels targeted by central banks in order to support robust economic growth. However, as central banks continue to provide very easy money there is an increasing threat of inflation lurking not through consumption goods and services, but rather in the form of growing asset bubbles in the residential and commercial property sectors and global share markets which continue to make new highs.

We expect there to be continued volatility in markets with the growing geopolitical risks and challenging economic growth outlook providing headwinds to future returns. Despite the less positive outlook for share markets, we don’t recommend allocating away from growth assets and into cash as it is extremely difficult to time the market accurately. Instead of attempting to make tactical changes to asset allocations, we recommend including an allocation to strategies with a specific focus on downside protection and capital preservation in portfolios. This allocation will reduce the severity of drawdowns and provide a smoother ride over the long term. Now, more than ever, it is crucial to invest in high quality investments managed by experienced and well-resourced managers.



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