A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
The year 2019 was a good one for financial markets and investors, with global equities up 27% over the course of the year. All major asset classes ended 2019 up on the year and risk assets were clear outperformers.
Global stocks rallied through most of last year, punctuated by short-lived sell-offs driven by rising trade tensions in May and worries about US growth in August. Risk assets largely shrugged off geopolitical concerns around the Middle East, Russian interference in foreign elections and growing US-China discord.
Equities were supported by unexpected monetary easing by the US Federal Reserve and the European Central Bank (ECB) designed to bolster growth. At the end of 2018, financial markets had expected the Fed to raise interest rates and the ECB to end its programme of quantitative easing in 2019. Instead, the Fed made three 25bps rate cuts and the ECB reduced interest rates and eased monetary conditions.
For equities the bad news from slower global growth was more than offset by the good news from monetary easing. Equities in all major economies posted gains last year. Greece was the best performing market in the developed world, with stocks up 51%, as the Greek economy outperformed major European peers. US and Dutch markets came joint second, up 34%. German and Italian markets were up more than a fifth despite both economies coming close to recession.
UK equities returned 20%, buoyed by the outcome of the general election in December which ended a prolonged period of political uncertainty. The FTSE 250 index of medium-sized companies with a domestic focus outperformed the more internationally exposed FTSE 100 index of major companies.
Emerging market stocks, up 22%, were boosted by monetary easing undertaken by several emerging market central banks, including China’s and India’s. The easing of US-China trade tensions and the “phase-one” trade deal between the countries agreed in December helped. The ending of the US Fed’s programme of interest rate rises, which had attracted capital away from emerging economies and back to the US, provided further support.
Within the equity market, growth stocks, especially those in the technology sector, were the strongest performers. Among the “FAANG” technology stocks, Apple and Facebook delivered the best returns, with Apple almost doubling in value since last January. Shares in Facebook and Microsoft returned more than two-thirds. Slowing retail growth and greater competition in the video streaming market saw Amazon and Netflix perform broadly in line with the S&P 500.
The oil price has risen by 22% in the last year. A year ago concerns over slowing global growth had pushed oil prices to their lowest level since the summer of 2017 and spurred OPEC production cuts. More recently, turmoil in the Middle East has raised the risk of supply disruptions and offered support to crude prices. Industrial metal prices increased only modestly last year reflecting slowing global manufacturing activity. Agriculture and livestock markets performed marginally better despite trade tensions. (Pork prices were buoyed by African swine-flu which has devastated Chinese pork supply.) Overall, the S&P/Goldman Sachs commodities index rose 14% last year. Elevated perceptions of economic and political uncertainty and, over the summer, talk of a potential US recession, boosted the price of gold, which rose 22% last year.
In bond markets, government debt underperformed equities with US treasuries and UK gilts returning less than 10%. Corporate debt fared better, with riskier high-yield corporate bonds beating investment-grade counterparts.
In currency markets, sterling was the strongest major performer, up 4% on a trade-weighted basis helped by the outcome of December’s general election. The Japanese yen and US dollar remain close to their levels in January 2019 while the trade-weighted euro fell by 2%.
Of the themes that dominated news last year climate change had a significant impact on some assets. Electric vehicle maker Tesla’s shares have almost tripled in price since summer and its market capitalisation has eclipsed that of General Motors and Ford. Shares in plant-based meat substitute maker Beyond Meat have risen by 68% since its IPO in May.
Marijuana producers, which benefited from Canada’s legalisation of cannabis in 2018, hit a rough patch last year. Delays in achieving regulatory approval, especially in Canada, have hit stocks. Shares in Canopy Growth, the largest public marijuana business, have more than halved in price since May.
Among alternative assets, Bitcoin has had a topsy-turvy year. It staged a strong recovery after a sharp fall in 2018, peaked last summer and, despite having sold off since, is still priced at twice the levels of a year ago.
The year 2019 was characterised by a growing divergence between equity markets, supported by easy money, and a slowing real economy, buffeted by policy uncertainty and geopolitics. 2020 looks likely to be a year of rather weaker growth in advanced economies and China, and slightly stronger activity in other emerging economies. A continued rally in risk assets will be heavily dependent on the decisions of central banks and governments.
On a final note – last year we wrote about the success of the UK’s minimum wage, 20 years after it was first introduced. At the end of last year, the government announced the National Living Wage (NLW) will rise by 6.2% from April, more than four times the rate of inflation, taking hourly earnings for over-25s to £8.72.
The government said it was delivering the “biggest cash increase ever” as part of chancellor Sajid Javid’s promise to increase the NLW to £10.50 an hour by 2024. This four-year target would make the UK’s minimum wage the highest in the developed world, and around two-thirds of median UK earnings. The Low Pay Commission, an independent body which advises the government, recently said the planned increase would benefit nearly three million workers.
The Commission also cautioned it could stretch many employers and needed to be accompanied by measures which boost productivity. Over the last decade substantial real-terms increases in the minimum wage appear to have had little measurable effect on job opportunities. But as the minimum wage rises to relatively high levels so, too, do the risks to jobs.
