2019 asset performance at a glance
2019 has been a turbulent year for global asset performance. Macroeconomic factors like Brexit and the Trade War aroused salient market swings through weakening global economic momentum and heightening geopolitical risk. The global economic slowdown dragged overall manufacturing, with a decline in industrial production sounding alarms on profitability concerns amid lower earnings.
Despite higher volatilities, the US economy was still a strong performer in 2019, particularly compared to other major world economies. Supported by a strong consumer sector, the US economy shows few signs of recession and remained undisturbed by an inverted US yield curve – a traditionally reliable signal that an economic recession might be on the horizon.
2019 has surprised most investors. Despite the backdrop of a significant drop by global equities in late 2018, the table below shows positive returns among almost all asset classes in 2019. US equities gains exceeded 30% while the fixed income sector, supported by increased liquidity from rate cuts and quantitative easing, also performed remarkably strong. Meanwhile, safe-haven commodities like gold and silver saw increased price levels due to perceived market turbulence.
Asset Class Performance in 2019
Sources: Bloomberg, Assured Asset Management
What do we expect in 2020?
Looking forward, we believe widespread market uncertainties will continue to significantly impact asset performance over the coming year. In particular, the US-China trade war is unlikely to reach a conclusion in the near future while Brexit draws closer. Additionally, 2020 will be further painted by US presidential elections, major central bank fiscal policies, and other international political inflection points. As a result, we believe that global economic growth will remain sluggish while experiencing significant market turbulence and volatility. That said, we view the likelihood of a serious market downturn or financial crisis unlikely in 2020.
How to properly allocate assets amid heightened volatility?
2020 will be a year filled with uncertainties. Mounting geopolitical risk could challenge investor ability to properly price assets and, as a result, make it difficult to achieve optimal asset allocation while effectively managing risk exposure.
Bond markets are also anticipated to experience price corrections with recent price appreciation unsustainable at record low interest rates worldwide. Traditionally risk-averse investors will be challenged with the decision to invest in higher-risk assets or risk facing negative returns.
Equity markets could also face a market correction in 2020 with tight labor markets pushing up wages and contributing to increased margin pressures in most regions. As a result, valuations based on forward price-to-earnings basis will face increasing scrutiny. It is also unlikely that the decade’s best performing asset class around the world will have the capacity to sustain record highs. As such, it is predicted that many investors will take profits amid a cautious 2020 outlook; therefore, we do not expect strong performance from equities over the coming year.
As a result, we anticipate stark market volatilities in 2020. However, traditional counters to high volatility like safe haven assets may already have market expectations priced in. With gold and silver currently at high relative prices, upside is limited with a high risk of price correction.
Where should investors turn?
Diversification is crucial to achieving a well-balanced optimized portfolio that can weather any economic storm. Alternative investments have become increasingly established as a building block of portfolios, particularly in today’s world of low-for-longer interest rates and yields. This unique asset class is appreciated not only for its diversification benefits, but also for providing stability to portfolios. In a climate of rising market volatility and lower bond yields, demand for alternative assets has soared.
Consumer loans as an alternative asset is alluring due to its strong diversification appeal, low correlation to geopolitical uncertainty, and equity-like returns with bond-level volatilities. Investing in consumer loans has exhibited attractive absolute and risk-adjusted returns, even during periods of market uncertainty. Its performance has shown resilience during times of financial distress like the 1997-98 Asian Financial Crisis and the 2008 Global Financial Crisis, as well as more recently during the initial Brexit concerns in 2015 and the US presidential election of 2016, when other traditional asset classes struggled. Considering the cautious market outlook for 2020, consumer loans are a natural fit as a preferred defensive tool to improve investment returns.
FinEX Asia Marketplace Credit Fund Performance (%)
Source: Assured Asset Management
The asset that still shines
Additionally, robust economic data continues to support US consumer lending growth. With unemployment rates at near multi-decade lows and rising wages, household spending continues to edge higher while mortgage delinquency rates remain at 20-year lows. The Federal Reserve’s monetary easing policies have also helped prop up spending and home buying. Strong consumer demand will continue playing a critical role in supporting US economic growth.
US Unemployment Rate and US Average Hourly Earnings (%)
Source: Bloomberg
As global markets brace for mounting uncertainties in 2020, investment portfolios must be optimized to effectively manage risk and withstand potential headwinds. It will be increasingly important to diversify portfolios with assets from a basket of classes that react differently to various market events. Only truly diversified portfolios will effectively minimize risk while maximizing returns and shine in the year to come.
