2019: The best year financial markets have ever had?
LONDON (Reuters) – For all the angst about trade wars, geopolitics and a sputtering and overly indebted global economy, 2019 might just be the best year investors have ever had.
The numbers are staggering. Global stocks have piled on more than $10 trillion, bonds have been on fire, oil has surged almost 25%, former crisis spots Greece and Ukraine have top-performed, and even gold has sparkled.
Wall Street .SPX and MSCI’s near 50-country world index .MIWD00000PUS have both stormed to record highs after 30% and 24% leaps. Europe, Japan, China and Brazil are all up at least 20% in dollar terms too. Not exactly shoddy.
A mirror image of 2018, when almost everything fell? Perhaps. But there have been a couple of important drivers.
One was China showing it was serious about stimulus for its $14 trillion economy. The other was the screeching change of direction by the world’s top central banks, led by the Federal Reserve, which cut U.S. interest rates for the first time since the financial crisis more than a decade earlier.
“Whereas a year ago the Fed was raising rates and earnings were rolling over, this year you have felt the Fed has been on your side,” said James Clunie, who manages asset firm Jupiter’s Absolute Return Fund.
“They are willing to do QE4 at a stock market (record) high, which is extraordinary,” he added, referring to Fed efforts to bring down a spike in money market rates that some suggest could presage a fourth round of quantitative easing asset purchases.
That Fed shift and the worldwide blizzard of rate cuts that have come since have fired bond markets up like a rocket.
U.S. Treasuries, the world’s benchmark government IOU, have made a whopping 9.4 percent after yields plunged as much as 120 basis points. That followed a near 40 basis point fall the last quarter of 2018, after five quarters in which they had consistently risen.
German Bunds — Europe’s safest asset — have had their best year in five years, making roughly 5.5% in euro terms as the European Central Bank has reversed course too. The yield on 10-year debt dropped below zero percent for the first time since 2016 in March and dived as deep as -0.74% in September.
In commodities, oil has raced up almost 25% following its best first quarter since 2009. That, plus key dividend rule changes, has made Russia’s stock market the best in the world with a 40% rise and also made the rouble a top three currency.
Metals have had a more mixed time. Copper is only 4% higher after buckling badly when trade tensions flared in the middle of the year, and aluminum is down 2%. But palladium, used in car and truck catalytic converters, has boomed 55%, while gold has had its best year since 2010 with a 15% jump.
A statistic likely to make most jaws drop is that Greek banks — remember all that euro debt crisis and capital controls stuff a few years back? — have been some of the world’s best-performing stocks this year.
The country’s biggest lender Piraeus Bank (BOPr.AT) is up 250%, as is smaller Attica Bank (BOAr.AT), helping make Athens Europe’s strongest bourse this year.
But even those gains look skimpy in comparison to Californian video streaming darling Roko (ROKU.O), whose shares have risen 440% this year.
Tech has remained top more broadly. Apple (AAPL.O) may just have lost its crown as world’s most valuable firm to Saudi Aramco but it can console itself with its 77% leap this year.
Facebook (FB.O) has surged 57%, Microsoft (MSFT.O) 53%, Google (GOOGL.O) 30%, Netflix (NFLX.O) 24% and Amazon (AMZN.O) 19 percent. China’s tech sector .CSIINT is right in mix too with a 64% rally and online behemoth Alibaba (BABA.K) up 53%.
Cryptoassets have been typically wild. Bitcoin was up over up 260% in June but it has been hauled back to around 85%.
Riskier high-yield debt, corporate bonds and local currency emerging market bonds and have all brought in between 11%-14% while Ukraine’s dollar bonds and Greece’s euro bonds have piled on over 30%.
“It is just a great year for the asset class,” said Pictet emerging market debt portfolio manager Guido Chamorro.
“It has been a relentless rally across the board over the last couple of months and it is possible that it continues into next year.”
Despite almost daily Brexit chaos, the loss of another prime minister and a snap election, UK gilts have returned 4.5% and a near 6% rise could land sterling its best quarter since 2009.
In contrast, the Fed’s pirouette and easing of trade tensions means the dollar index .DXY is about to experience its worst quarter in 1-1/2 years. It is still clinging to a 1.5% gain for the year, though, meaning it will be the euro’s EUR= fifth red year in six.
As usual the big swings have been in emerging markets. Argentina’s peso ARS= and Turkey’s lira TRY=, 2018’s punchbags, have taken another beating. Argentina’s woes have worsened such that it is restructuring its debt again while Turkey’s worries have not really gone away.
At the other end of the spectrum, a new president and a new reform agenda have seen Ukraine’s hryvnia UAH= rocket 19%. Russia’s rouble is up 11% and Egypt’s pound EGP= is sandwiched in between with a 11.7% gain.
The decade of debt, big deals, bigger risk
Whatever nickname ultimately gets attached to the now-ending Twenty-tens, on Wall Street and across Corporate America it arguably should be tagged as the “Decade of Debt.”
With interest rates locked in at rock-bottom levels courtesy of the Federal Reserve’s easy-money policy after the financial crisis, companies found it cheaper than ever to tap the corporate bond market to load up on cash.
Bond issuance by American companies topped $1 trillion in each year of the decade that began on Jan. 1, 2010, and ends on Tuesday at midnight, an unmatched run, according to SIFMA, the securities industry trade group.
In all, corporate bond debt outstanding rocketed more than 50% and will soon top $10 trillion, versus about $6 trillion at the end of the previous decade. The largest U.S. companies – those in the S&P 500 Index .SPX – account for roughly 70% of that, nearly $7 trillion.
What did they do with all that money?
It’s a truism in corporate finance that cash needs to be either “earning or returning” – that is, being put to use growing the business or getting sent back to shareholders.
As it happens, American companies did a lot more returning than earning with their cash during the ‘Tens.
In the first year of the decade, companies spent roughly $60 billion more on dividends and buying back their own shares than on new facilities, equipment and technology. By last year that gap had mushroomed to more than $600 billion, and the gap in 2019 could be just as large, especially given the constraint on capital spending from the trade war.
The buy-back boom is credited with helping to fuel a decade-long bull market in U.S. equities.
Meanwhile, capital expenditure growth has been choppy at best over 10 years. This is despite a massive fiscal stimulus package by the Trump administration, marked by the reduction in the corporate tax rate to 21% from 35%, that it had predicted would boost business spending.
One byproduct of stock buy-backs is they make companies look more profitable by Wall Street’s favorite performance metric – earnings per share – than they would otherwise appear to be.
With companies purchasing more and more of their own stock, S&P 500 EPS has roughly doubled in 10 years. Meanwhile net profit has risen by half that, and far more erratically.
The corporate bond market has not only gotten bigger, it has gotten riskier.
With investors clamoring for yield in a low-rate world, debt rated only a notch or two above high-yield – or junk – bond levels now accounts for more than half of the investment-grade market, versus around a third at the dawn of the decade.