After such a dismal performance in 2018 for most asset classes with particular reference to high yield and equities), few would have expected a remarkable recovery in the first half of 2019. From sovereigns to Investment Grade corporate bonds, high yield bonds and emerging market credit, not to mention equities being expectedly the best performing asset class in H1-2019.
Heading into the first month of 2019, investor sentiment was dwindling on the back of an awful performance in global markets in 2018 based on the fact that the December G20 failed to live up to market and investor expectations when it came down to Trade Talks between the US and China; a rally in the 10-year US treasury yield putting pressure on borrowing costs for companies and highly volatile markets resulting in a spike in risk aversion.
Given this scenario, investors were caught between various scenarios; (1) taking risk off the table by selling their holdings to limit more haemorrhage; (2) sticking to their guns, maintaining their asset allocations in the hope of better performance in 2019 – keeping in mind that trade war talks, Brexit, the Italian political uncertainty and the more-hawkish-than-expected US Federal Reserve and European Central Banks in the latter stages of 2018; and (3) pluck up the courage and use excess cash to average down on beaten valuations by putting more money to work after such a sharp correction.
Undoubtedly, taking stock of the situation on 30 June 2019, those investors who opted for (1) are by far worse off than those who chose routes (2) and (3). In hindsight, one could say that it is easier talking about what could have been and what should have been, but one of the not-so obvious-to-many key points to make money in these markets is to be on the right side of the market. And that requires (i) knowing when to take a hit and sell positions from a portfolio; (ii) sticking to your guns by acting on conviction and by being able to read the market and all the data points which lead asset managers to formulate their outlooks and base their strategic asset allocation on; and (iii) yes, at times, taking a contrarian view on the market – buying when the market is in a correction, and selling when markets are rallying.
These three characteristics are key to not only matching market returns but also generating a return in excess of the market, better known in investment jargon as alpha. While the sharp U-turn back to a more accommodative and dovish US Federal and European Central Bank in the first quarter of 2019 might have come as a surprise to many, as did Donald Trump’s infamous tweet on additional tariffs in the first weekend of May 2019, it was not so hard to predict that some form of truce between the US and China would have been eventually met as there is far too much at stake for both economies. This is particularly for true for the US given the fact that 2020 is election year in the US and Trump would not want to go to the elections with the US economy in a recession.
In order to understand the gains in 2019, one needs to understand the intricate reasons why markets sold off in 2018, and why central banks are precisely opting to remain dovish for longer. And this is because the global economy is not growing as it should, and many argue that this is the consequence of being at the tail end of expansionary cycle. Seeing equity markets return in excess of 15%, sovereign bonds, high yield and emerging markets post +5% returns in only a span of 6 months, could well explain that investors remain cash rich and the global search for yield and return does not look to be dissipating in any way.
And this makes the second half of 2019 to be even more challenging; shall we lock in these returns, take profits and sit back and enjoy the second half of the year? Has the rally got more steam left in it? Potentially yes, even bearing the fact that the market appears to be expecting a fresh wave of Quantitative Easing by the ECB and that there could still be some positive signals emerging from the on-going trade war negotiations. Given the way central banks have supported markets, markets are now selling off on the release of positive economic data; case in point is last Friday’s late market correction after the positive jobs report.
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