Next Year Will Be Different
By Rudi Filapek-Vandyck, Editor FNArena
MFS strategist Robert Almeida summarised it best in his latest reflections: "Investing is simple, but hard".
Those who had been expecting logical, straightforward outcomes for financial assets in calendar year 2019 have been hit with multiple surprises as the year went by.
One of the biggest surprises, no doubt, is that the year that saw corporate earnings growth grind to a halt in the USA, with Australian dividends going backwards on top of falling profits, while there has been no tangible progress in the conflict between Washington and Beijing, yet also witnessed share market indices surging to new all-time highs, with short term momentum pointing further upwards.
This ain't normal, is it?
Well, according to Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania in Philadelphia, global equities don't seem overvalued, but rather fairly valued and there are no signs bond yields should be surging higher any time soon.
Siegel's view, which usually swings between mildly optimistic and outlandishly bullish, is based upon the observation that financial markets function differently in a world of persistently low interest rates. In simple terms: equities have become the main attraction for income-hungry investors whereas government bonds are now being used to hedge against negative risks.
Irrespective of whether one agrees or disagrees with Siegel's optimistic outlook for equities in 2020, maybe the more important question is whether things are genuinely different this time, and if so, whether investors can expect things to revert back to the old normal?
Share market experts and commentators like to talk about the longest bull market in history, but nowhere has the equities bull market been as consistent and as profitable as in the USA. At face value, this is easily explained by what investors casually refer to as "market fundamentals".
In practice this means: American companies have shown better growth than their foreign counterparts. It seems but fair their share prices have outperformed the rest of the world. Add bond yields persistently near historically low levels and it should be no surprise equity valuations have moved beyond historical averages too.
The fact US utilities and infrastructure stocks have become a popular go-to destination for investors worldwide seems to combine all the important themes that have dominated this bull market since 2012: income plus growth.
Behind the scenes of it all, there is one ingredient to the secret sauce that receives far less attention: the fact that American companies have used this new environment of exceptionally low interest rates and bond yields to buy back their own shares and leverage up their balance sheets.
It has been dubbed "financial alchemy" by some of the more critical bystanders. One of the direct consequences is that American share markets have shrunk in recent years (less shares available to invest in), which could explain why markets kept rising while investors have been withdrawing more funds than directing them towards US equities.
Note: post 2012, every single year has seen the US share-count shrink compared with the year prior, including 2019.