Greece outshines in bonds and manufacturing
With global economic growth sluggish and inflation low, bond yields tumbled. At the peak in August, 40% of developed market government debt had a negative yield. The bond market generated a long list of other remarkable statistics in 2019. We gasped when Italian 10-year yields fell below 1% in August and held our breath as they hit 0.5% a month later. Almost the entire Italian yield curve now lies below its US equivalent. But the prize for the best performer in the EU goes to Greece, a market that few investors would touch a few years ago as they restructured their debt and 10-year yields reached 35%. Today, Greek government bonds now yield just 1.5% at 10-year maturities, a decline of 2.8 percentage points year-to-date with a yield curve which also lies below that of US Treasuries. To top it all, Greece enjoys one of strongest manufacturing purchasing managers’ index (PMI) whereas that for Germany is in recession territory.
Bond markets may have enjoyed a strong rally in 2019 but investors required nerves of steel or good fortune to make the most of the performance. The year-to-date return on 30-year German bunds hit 33% in August but they have since given back almost half of that and are now up ‘only’ 18%. Investors in the Austrian 100-year bond had an even more volatile ride: up 80% year-to-date in August and 46% now. By contrast, the UK gilt market was a sideshow.
Growth stocks outperform
Tumbling interest rates provided the background for the strong performance in equity markets, led by the NASDAQ. This provides further evidence for the role of interest rates, as the index is weighted towards ‘growth’ or ‘long duration’ stocks that benefit most from lower interest rates. It certainly wasn’t earnings’ strength that pushed markets higher: most major markets look set for flat or negative growth in earnings in 2019. Indeed, one of the most powerful themes in equity markets in recent years – the outperformance of ‘growth’ versus ‘value’ – was propelled further by declining interest rates and, on some measures, now looks fundamentally overvalued.
Emerging markets have struggled
Emerging market (EM) equities produced decent returns in absolute terms but underperformed developed markets (DM) consistently over the year. It remains to be seen whether the significant interest rates cuts in EM generate a revival in 2020. China undoubtedly suffered from the tariffs imposed by President Trump, which went far further than expected by most market participants, including ourselves. But other EM markets delivered similar lack lustre performance. The FTSE-100 was one of the few DM indices that matched EM’s underperformance. It is traditionally a defensive market but also suffered from being the biggest underweight in global portfolios according to most surveys due to Brexit uncertainty.