Year of the Pig reflections: Which assets performed best

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 last Year of the Pig reflection asked which mainstream and which alternative asset classes would be the most likely to stand out over the coming 12 months. 

Which asset class will offer the best risk-adjusted returns?

Answer: Emerging market equities (mainstream), private credit (alternative)

Predicting asset class performance is inherently difficult. Our predictions that emerging market equities and private credit would stand out both appeared to be solid, and indeed both areas did offer some pretty enticing returns.

The only trouble is, so did almost much everything else. The top mainstream asset class of 2019 ended up being US equities, where the S&P 500 offered returns of around 25% over the past 12 months. That easily beat out the 15% or so provided by companies tracking, for example, the MSCI Emerging Markets Index over the same time period. US investment grade and high yield bonds also yielded double digit returns.  

The strength of almost all asset classes was certainly not something that neither we, nor the various fund managers, asset owners and consultants that we spoke to, anticipated. And with good reason; global GDP growth was not especially good last year, with the US and Chinese economies both slowing from the previous year. From a fundamental perspective there was little reason for assets to perform so well.

And yet, they did. Investment experts now place this down to a combination of US rate reductions, which encouraged investors to feel there was more life in the party in the country and that bonds would perform better versus these reduced amounts, combined with various measures to either improve liquidity or conduct outright quantitative easing.

In other words the world was (and is) flush with money, and it needed to be invested. US equities and investment grade bonds both benefited, as we noted before. So did emerging market equities, but to a lesser degree. 

On the private asset side, private equity funds also kept on thriving, but the gloss fell off of private credit a little. Alternative asset data provider Preqin noted that aggregate capital raised for private debt funds fell to just over $107 billion in 2019, versus over $130 billion in 2018.

Still, the funds looked set to return between 8% and 10% internal rates of return (IRR) during the year, which seemed to appeal to many investors. Preqin indicated in November report that 39% of investor respondents said they intended to allocate more to private debt in the next 12 months. 

However, private equity comfortably beat this out. Bloomberg reported Preqin's estimates that North American private equity funds chalked up an IRR of 16.4% in 2019, those centered on Europe returned 18%, and funds focused on Asia generated 12.8%. These sort of returns helped fuel over $500 billion in new asset allocations to private equity funds last year. 

The asset class's ability to comfortably provide double digit returns will just encourage more yield-hungry asset owners to give them money, just adding to the global warchest awaiting investments. Private equity returns look likely to slowlly diminish, but demand remains very strong. 

Previous Year of the Pig reflection articles: 

Will the US economy suffer a major downturn? 

Will ETF Connect between China and Hong Kong finally open?

How much will Asian asset owners add to alternatives?

Have asset owners set realistic investment targets for 2019?

Will asset owners treat ESG as more than a box-ticking exercise?

Will Brexit have a major impact on global or Asian markets?

Will fixed income outperform equities?

Will the US-China trade war intensify or reach an armistice?