Global Weekly: Great year for equities

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Equity markets, on average, did not move much during the last trading weeks of 2019. It has, however, been a great year for equity investors.

Equities have done very well in this low-interest rate environment, because of the accommodative stance of central banks across the globe, a de-escalating trade war between the US and China and the fading fear of a global recession during 2019. Both the S&P 500 and the Euro STOXX 600 were able to set new all-time highs. The MSCI Emerging Markets Index still has some room left to reach new highs. The expectations of a stabilising Chinese economy in 2020, further decreasing trade tensions and perhaps a weaker US dollar could be catalysts for emerging markets, and specifically Chinese equities, to do well in 2020.

If we look at MSCI World sector performance in 2019, we observed a strong performance from information technology, communication services and consumer discretionary. Companies such as Microsoft, Alibaba and Apple led the way. The energy sector continued underperforming the MSCI World Index and has by far been the worst performing sector in the MSCI World over the past 10 years, even with dividends included. We move into the next year with an overweight positioning in information technology and health care, while we are more cautious towards consumer staples and utilities.

Now that trade tensions have faded, it will be interesting to see in 2020 whether companies will regain confidence in the business environment and start to increase their investments, and be able to show solid earnings growth. In addition to these fundamentals, political news will definitely continue to dominate the headlines in 2020, with the impending impeachment trial of US President Donald Trump, ongoing trade negotiations between the US and China and the general US elections in November 2020.

On a company level, we saw Amazon.com doing well last week. The company announced record-breaking sales during the holiday season. Negative news came from EssilorLuxottica, a French-Italian eyewear manufacturer, that revealed fraudulent activities in a Thailand Essilor plant. Although the stock has done very well over the past six months, this will put more pressure on management to increase the speed of integrating Essilor and Luxottica after the two companies merged in 2018.

Meanwhile, Airbus started the new year on a positive note. It looks like the company has now become the world’s largest plane maker, based on strong deliveries in the last months of 2019.

Bonds: Inflation still subdued

US Treasuries ended the year at 1.91%, moving slightly higher during the last week of 2019. This led to a higher yield difference between the 2 and 10 year US Treasuries. This phenomenon of spread widening, from 15 towards 35 basis points (bps), took place since the end of November.

The phenomenon can be explained by the phase-one deal between US and China, but also by the increased market optimism on somewhat higher inflation expectations for 2020 and beyond. Typically, higher inflation expectation should lead to somewhat higher bond yields, as bond investors would like to see interest rate compensation for higher inflation.

ABN AMRO still sees some near-term upward pressure on headline inflation from rising oil and food prices, but expects the impact to prove transitory. Underlying inflationary pressures are likely to remain subdued against the background of weak economic growth and very low inflation expectations. ABN AMRO does not expect companies in advanced economies to respond to pressures on margins by raising prices in this environment. Also, structural downward pressures on inflation from digitalisation are likely to persist.

European economic growth and inflation could disappoint the expectations of the ECB and a second stimulus package in March could be in the air. ECB Chair Christine Lagarde will provide us with her update on 23 January, after the ECB policy meeting. Before this meeting, we will hear the European commission on their challenges for 2020 and how they will approach them.

Delen