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As the year began, so it ended, with yet another strong month for risk assets in December, capping one of the best years for markets since the financial crisis. Equities again led the charge, but leadership for once slipped from the US to emerging markets, which returned 7.5% in the month, well ahead of the US and MSCI World with 3.0% returns. This resulted in full year returns for the US of 30.7%, MSCI World 27.7% and MSCI Emerging Markets 18.4%. The ‘risk on’ environment led to safe haven government bonds weakening while high yield and emerging market bonds produced gains of 2.0-3.0%, with annual gains of 14.3% (US high yield) and 12.6% respectively.

In 1998, researchers at the Weizmann Institute of Science in Rehovot, Israel, showed that electrons passing through a membrane behave differently when being observed. In a similar way, investors looking for the next bear market are affecting its timing. Bear markets are typically preceded by a period of irrational exuberance, which seems a quantum leap from where the collective mood in markets is today. Traditional indicators such as the shape of the yield curve and the level of equity market valuations have proved ineffective thus far in this latest cycle; little surprise perhaps given the changing rules of the game, with risk free rates (here thinking about US Treasury Inflation Protected Securities) having declined to zero over the past 23 years. Instead of adhering to any single rule of thumb, we have preferred to stay invested on behalf of our investors and broadly diversified, to good effect in 2019.

While high growth/momentum stocks have performed well for some time, they have historically been susceptible to momentum crashes which have tended to coincide with bear market periods. As stock markets reach all-time highs and the US enters its tenth year of economic expansion, we think that having exposure to value stocks still makes good sense. We have long been of the view that having balanced factor exposure is the best way to achieve excess returns, and now does not seem the time to abandon this philosophy.

Following the worst year for equity markets since the financial crisis, 2019 was one of the best. Many risks failed to materialise: US-China trade wars moved towards a phase one deal, the UK did not fall over the Brexit cliff edge, the World economy slowed but did not enter recession, China’s debt bubble was contained and geopolitics caused ripples but no dislocation. Most important was the policy pivot by the Fed, from a restrictive stance to much looser policy. But corporate earnings were flat, so returns of 28% from world equities leave valuations materially higher than a year ago. Can this bull market, the longest in history, continue?