At the beginning of every Chinese New Year, AsianInvestor makes 10 predictions about the economic, political and financial developments that are likely to have an impact on the way institutional investors allocated their portfolios.
Our new Year of the Pig reflection asked whether equities or bonds would be the best-performing asset class of the year, following a last quarter in late 2018 when both had seen heavy losses.
Will fixed income outperform equities?
Answer: No (but equities will only outdo bonds marginally)
While AsianInvestor's prediction made sense, we were unaware of just how well primed both equities and bonds across the world were to enjoy a renaissance during 2019. As a result, our prediction of a marginal rise in equities ended up being far too conservative.
The year proved to be a good one for most mainstream asset classes. Bonds did extremely well, with the Bloomberg Barclays US Corporate index returning 14.81% for the 12 months to January 17, and the Bloomberg Barclays Global Average Corporate Return index reporting 11.28% return over the same time period. Meanwhile the JP Morgan EMBI Global Core Index, which tracks emerging market bonds, returned 17.14% for the 12 months ending January 17.
Equities offered similar or better rates of return. The S&P 500 index increased by a whopping 26.46% over the past 12 months to January 17, the MSCI World Index enjoyed a 20.26% rise and MSCI's famous Emerging Markets index increased by 13.66% over the same time period.
Closer to home, Hong Kong's Hang Seng Index rose 6.84% and the Shanghai Composite Index notched a 15.56% return for the 12 months to January 17.
The ability of almost all equities and bonds to rise stood in stark contrast to the global economy, which saw growth dip from 3% in 2018 to 2.3% last year, its slowest rate of growth in a decade. The US's GDP growth looks likely to slip from 2.9% in 2018, while China's economy slowed from 6.6% to 6.1%, its slowest rate in 30 years. However, a series of rate cuts and stimulus measures in the US, combined with very low rates and quantative easing in Europe helped flood the financial markets with funds and led to increased investment.
That particularly benefited equities and bonds, after both asset classes had suffered dismal performance during a rough fourth quarter of 2018.
It remains to be seen whether this dynamic will continue to play out this year. US equities are looking fairly well valued now, with S&P 500 companies possessing a pretty rich-looking current price to earnings ratio of 25.04%. Meanwhile, bonds could struggle to offer a lot more zip too, as further rate cuts appear limited.
Previous Year of the Pig reflection articles: