Download full article

December Investment Strategy: A Year of No Returns

Key points

  • When the quantitative easing goes out: 2018 has been unique in terms of the breadth of negative returns across assets.
  • The overarching theme of 2019, if not beyond, is likely to be underwhelming asset returns.
  • The change in tone at the December Federal Reserve meeting should help contain downside growth scenarios.
  • Our asset allocation remains unchanged, with modest risk appetite, partly shifting from US to emerging market equities and underweight investment grade

2018, a frustrating year for investors…

As the year comes to an end, we look back in this Monthly Investment Strategy at macroeconomic and market performance and surprises. Such a post mortem analysis is a healthy, usually humbling exercise, and is often rich in lessons.

While 2017 was an enjoyable synchronisation of positive growth momentum and strong performance of risky assets, 2018 will hardly be missed. Equity returns are closing the year poorly across the board, with the US outperforming and defensives posting marginally positive returns. Breaking down global equities’ total returns
(-6.7% year-to-date at the time of writing), robust earnings growth delivered close to 19.4% and dividends contributed around 2.4%. But despite this strong fundamental backdrop, valuation multiples contracted sharply by 23.7%. This de-rating of equities can be attributed to a mix of higher risk-free rates and poor investor sentiment. In particular, on top of lacklustre growth, euro area equities disappointed in the wake of political risk. Emerging market equities, meanwhile, suffered from both tighter financing conditions and concerns around trade protectionism.

Credit inevitably succumbed to equity contagion, especially in the last quarter of 2018. Over the past month, the risk-off mood pushed credit returns deeper into negative territory. The pain has been particularly acute for high yield, upending the reflation trade that saw high yield outperforming investment grade for much of 2018. The repricing is nothing short of dramatic with euro credit spreads almost doubling from their February lows.

…and a challenging 2019 ahead, especially as our risk scenarios are already unfolding

As we explained in our 2019 Outlook published last month, some of this unimpressive market performance stems from the forward-looking feature of asset prices. In this sense, 2017’s market gains could be explained by realistically positive expectations for 2018 top-line and earnings growth, whereas risky assets would have suffered this year as a result of the anticipation of the upcoming global economic slowdown. We however believe that the rise in cross-asset correlation (which limited the benefits of diversification in 2018) and in market volatility (first with a spike in February then more gradually and persistently since early October) point to an alternative explanation: the end of the global expansion of central banks’ balance sheet and the reversal of the liquidity tide of which Warren Buffet famously warned. If this is the case, 2019 and possibly beyond could prove just as challenging with low returns and high cross-asset correlations.

2019 may prove all the more challenging if the two risk scenarios we outlined in our 2019 Outlook, and which have already begun to unfold in December, gain further traction: the US Federal Reserve (Fed) losing confidence and the Eurozone economy exiting the cyclical expansion first even though it entered the cyclical upswing last.

Download the full executive summary

DISCLAIMER

This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

In the UK, this document is intended exclusively for professional investors, as defined in Annex II to the Markets in Financial Instruments Directive 2014/65/EU (“MiFID”). Circulation must be restricted accordingly.

© AXA Investment Managers 2018. All rights reserved