Global equities posted solid returns during 2019, fuelled by accommodative monetary policies and political developments throughout the year.
Despite that, the US-China trade saga weighed on investments and global economic growth, de-escalation of trade tensions towards year-end led equity indices to extend the rally.
The stock market rally continued on thin trading volumes during the holiday period as equity indices lived up to the so-called Santa Rally.
This market anomaly describes the tendency for the stock markets to rally over the final trading days of December into the New Year due to the increased holiday shopping and optimism fuelled by the holiday spirit.
One of the key drivers of equity market returns in 2019 was central bank decisions. Monetary policies reversed course and turned accommodative during 2019 as the world economy continued to slow.
The US Federal Reserve cut interest rates three times in the second half of the year, amid a “mid-cycle adjustment” in the late economic cycle environment.
In Europe, an interest rate cut and a restart of the bond-buying program were former ECB President Mario Draghi’s final attempts at stimulating the flagging eurozone economy.
As central banks took a more dovish approach, yields remained suppressed which helped to boost equity market returns. Equity markets returns also reflected developments in the trade negotiations.
Investors turned to riskier assets as trade tensions started to de-escalate, most notably during the final quarter of 2019, as news of a “Phase 1” trade deal between US and China started to be priced in.
This agreement saw a reduction of tariffs and stopped new tariffs from becoming effective on December 15, which brought further relief to equity markets.
In terms of yearly returns, equity market indices locked in double-digit gains for 2019. The S&P500, which represents the US equity market outperformed on a yearly basis, albeit only slightly ahead than its European peers, measured by the Eurostoxx 50, on a total return basis.
The top-performing sector in the US was the technology sector followed by the communication and financial sector. Similarly, in Europe, the technology sector led the gains, boosted by the performance of ASML Holding, followed by the industrials and consumer discretionary sectors.
Interestingly, the FTSE MIB, the benchmark stock market index for the Borsa Italiana, was the best performing index within Europe, with its return matching equity market returns in the US.
Despite the strong equity market returns, earnings growth on a yearly basis stood flat in the US. Meanwhile, corporate earnings growth in Europe were much stronger at 3%, rather surprising when considering that the latest annual GDP growth rate for the Euro area was 1.2%.
Despite the recent de-escalation of trade risks, we expect the US-China trade war to remain the overarching story, as negotiations shift to the second phase once the Phase 1 agreement is signed.
Key catalysts for the market also include Brexit developments, the Presidential election in the US and the increasing focus on the strength of corporate earnings, which will deliver a bottom up analysis of the real economy.
Disclaimer: This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.