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2019 review of the year

Graham Smith

Graham Smith - Market Commentator

If ever we were to look for an example of the unpredictability of stock markets, 2019 surely stands out as providing one. The stage was far from set for a good year in the final months of 2018. Back then, fears of more US interest rate rises, the effects of China’s economic slowdown and a brewing trade war were driving investors out of stocks.


Contrarians may disagree. They might say sharp falls on world markets and extreme levels of investor pessimism in late 2018 made a substantial rebound in the year ahead more likely. They would have been right.

What may have come as a surprise, even to them, is just how strongly markets rallied over the year. In aggregate, world stock markets added more than 20% in dollar terms, no mean feat as the US currency held its value against other currencies1. Please remember past performance is not a reliable indicator of future returns.

Also surprising were the performances of markets in the US and China, which spent most of the year in the eye of an international trade storm. In the US, technology companies were in the vanguard as the major indices sped to record highs2. Markets remained alert to signs the US economy was running out of steam, but they didn’t materialise to the extent feared.

In a similar vein, “new economy” stocks helped propel China’s stock market. The CSI 300 Index produced the strongest return of any of the world’s major stock markets, as confidence in the ability of the authorities to provide a boost to China’s economy if need be and hopes for a trade deal displaced earlier fears of an unmanageably sharp slowdown3.

Despite economic stagnation and an industrial recession gripping Germany, European markets also gained comfortably in excess of 20%. Japan nearly matched Europe, despite the country’s sensitivity to global trade and a consumption tax hike on 1 October4.

For all its local difficulties, the FTSE 100 also generated a double-digit return, buoyed most of the year by a weak pound – which increases the international earnings of many blue chips in sterling terms – and latterly by a partial reassessment of the virtues of cheap, domestically oriented stocks5.

The main driver behind such a sharp revival in market confidence was a turnaround in interest rate expectations in the US. Having led markets late last year to expect as many as four further rises in rates over the next 12 months, the US Federal Reserve scaled back its projections then proceeded to cut rates three times between July and September.

Still low inflation in the US and the effects of moderating growth at home and sharper slowdowns elsewhere in the world made the Fed’s “cushion against global risks” possible.

So market responses in 2019 were more about hopes for 2020 than the substance of 2019. The earnings growth of US companies ground to a virtual standstill over the year, albeit from a high base in 2018. Businesses with a large non-US exposure saw the biggest earnings declines6.

In Europe, a paucity of growth took its toll, with corporate earnings posting a small decline between January and September compared with prior-year levels7.

Throughout, global politics threatened to upset the apple cart. From the possible impeachment of a US president and fractious relations between the world’s two superpowers, to Brexit delays, another UK general election and worldwide demonstrations aimed at dealing a knockout blow to climate change, 2019 featured an extraordinary collection of uncertainties.

The Economic Policy Uncertainty Index – yes, there really is one – reflected this, spiking at the start of the year and then again during the summer8. This index takes account of factors such as the newspaper coverage of policy-related economic uncertainty and disagreement among economic forecasters.

Perhaps that was the main reason why precious metals performed so well, even as the demand from industry for them – in the catalytic converters of diesel cars in the case of platinum, for example – dipped9. Exchange traded funds (ETFs) tracking the gold price saw a surge in demand from investors, as the yellow metal wound its way back to levels above US$1500 an ounce in October10.

More predictably, perhaps, oil spent much of the year bound in the US$60 – US$65 per barrel range, caught between the opposing forces of OPEC production cuts on the one hand and an ample supply from American shale fields and global growth fears on the other11. More than used to be the case, oil companies had to look to alternative strategies and cost efficiencies to grow their earnings.

Rounding off the year – for UK investors at least – a snap general election dominated the headlines. The election was billed as unpredictable, but that was principally down to a lack of confidence in the polls, which failed to forecast accurately a late drop in support for the Conservatives in 2017.

In fact, the polls had been pointing to a landslide for the Conservatives for some time. This did not go unnoticed by the markets. Domestic stocks and the pound started moving higher in early November in anticipation of more clarity on the economic outlook and Brexit too. You had to be early to fully benefit from the essential thrust of the move.

The same applied to international investors in the lead-in to a mini pact between the US and China in mid-December. A so-called phase-one deal covered a number of areas long considered highly contentious – including technology and financial services along with new protections for intellectual property – demonstrating in real terms the desire on both sides to reach a broader accord.

2019 showed again that the best market moves are invariably difficult to forecast. They have a habit of coming when you least expect them; often when the future looks fraught with difficulty. In retrospect, the Fed’s management of interest rate expectations in the first few months of 2019 may go down as having been the perfect catalyst.

After such a positive year, investors may feel inclined to rein in their exposures to equities. They will know good years are invariably interspersed with bad ones – like 2018 – but also that the key to long-term success is to maintain an exposure to world markets over time.

A good way to do this is via a multi-asset fund of funds offering a broad exposure to equities, bonds and cash, perhaps other types of assets too. The Fidelity Select 50 Balanced Fund, fast approaching its second anniversary, is designed this way.

Funds chosen for inclusion are mostly taken from Fidelity’s Select 50 list of favourite funds – a good starting point. Overarching this, the fund’s manager, Ayesha Akbar, constantly monitors and, if necessary, adjusts the portfolio’s makeup according to her assessment of economic conditions and the prevailing opportunities.


1MSCI, 29.11.19, and Bloomberg, 17.12.19
2 CNBC, 16.12.19
3,4,5 Bloomberg, 17.12.19
6 FactSet, 06.12.19
7 I/B/E/S data from Refinitiv, 17.12.19
8 Economic Policy Uncertainty, November 2019
9 World Platinum Investment Council, 21.11.19
10 World Gold Council, 05.11.19
11 Bloomberg, 16.12.19
12 Bloomberg, 18.12.19

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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