In Dollar terms, global equities roared higher over the final quarter of 2019 rounding off a remarkable year for international markets. Whilst the divergence between the top performing regions and the bottom was pronounced, double digit returns were widespread. In past cycles, returns of this magnitude were dulled by high inflation. But today, inflation in the US is only 1.8% whilst interest rates are less than 2%. US equities returned 28.9% in 2019, representing a real return of over 27%. This compares with the long term average (going back over 90 years) of 6.5%. By any conventional measure, therefore, 2019 was an extraordinary year.
Once again, global markets were led higher by the United States. Although the Dollar was relatively weak against sterling, losing 4% of its value over the year (and nearly 8% in the final quarter alone), US equities still dominated equity index tables. Emerging markets produced the lowest return (+15.4%), but the importance of the US in global equity indices meant that World equities produced a 12 month return of 24.1% as investors continued to move money away from bond markets and cash where returns were significantly lower. Strangely, gold bullion, often the harbinger of doom, also enjoyed a good year, rising by 18.6% in Dollar terms. The early indications are that hedge funds have had another bad year relative to the market. But it was, unquestionably, in the wider equity market where the best returns were to be found.
So, what to expect in 2020?
Many of the key questions from 2019 remain unanswered as we head into the new year: Are we still heading for a global recession?; What is next for the UK and Brexit?; Will the US/China trade war simmer down or boil over?; and, what will Trump do next? This uncertainty (which undermines investment) coupled with a grossly over indebted financial system suggests that the current environment of sluggish economic growth and low inflation will continue for the foreseeable future – a scenario which has clearly been priced into the yield curve as evidenced by a current market value of sub-zero (negative) yielding bonds in excess of $10 trillion dollars. This low growth/low inflation scenario is further entrenched by limited scope for additional monetary policy loosening.
As such, we remain of the view that the world’s best dividend paying investments are likely to serve investors best in the years ahead. Not only are the dividend yields of high quality companies like Nestle and Coke significantly higher than bond yields, “defensive” products and strong balance sheets suggest they will continue to increase dividends (the long term driver of capital growth) despite challenging economic conditions and unpredictable politics.