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Kempen's Commentary: About the relativity of annual figures

10 January 2020


2019 was a wonderful year for investments. Each broad investment category generated a positive return. US stocks reached the highest returns of more than 30%, closely followed by European real estate. Despite low interest rates, bonds also realised positive yields. US corporate bonds were leading with 14%. But Japanese government bonds also realised a small positive result at zero interest rates. And even government bonds in the core countries of the euro zone, where 10-year interest rates are often negative, gained 4%.

Although risky investments generally largely exceeded the expectations, it wasn’t very difficult to generate positive returns after the weak Q4 of 2018. In that year, stocks and corporate bonds showed negative results, while real estate ended up at zero. This illustrates the relativity of this type of annual figures. The strongly positive returns in 2019 mainly originated from the dip that occurred almost exactly at the end of the previous year.

Can we conclude anything from this for the coming year? Well, a replay of 2019 seems very unlikely. For this to happen, the interest rate for bonds will have to keep going down. It’s possible, but not very likely. Even if the global economy continues to muddle on, we think that interest rates will rise rather than fall. In 2019, the American Fed and the ECB took a huge turn towards a more stimulating monetary policy and many central banks in emerging markets lowered the interest rates. This incentive won’t be repeated in 2020. There have been similar years to 2019 for stocks: in 2003, 2009 and 2013 global stocks realised annual returns of more than 20% (in 2003 and 2009 also after substantial losses in the previous year). Each of these three years was followed by another year of positive returns. So, it’s possible. 

In order to somewhat lower the impact of the starting date, it’s better to look a bit further back. Also then we see substantially positive returns. The past two years of 9% per year, from 2015 12% and from 2009 11%. From 1999 the average return on shares has been 5% per year. So, apart from the strong performance in 2019, stocks have shown high returns in recent years. Of course, decreasing interest rates have contributed considerably to this, but especially in the US stock valuations are now quite high. That makes us cautious for this investment category. Add to that the fact that the monetary stimulus of 2019 is difficult to repeat, that economic and profit growth will be limited, and that geopolitical tensions are still present and we foresee a challenging year for 2020.

The author

Joost van Leenders

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