Despite the threat of a trade war hanging over the market for most of 2019, stocks rallied to a series of all-time highs
A year ago, after bearish calls gripped markets, the idea that US stocks could go on to achieve one of their best results in decades would have been unimaginable. Fast forward to now, and the record books will speak volumes about the stock market in 2019 and what ended up closing as the best-performing decade since the 1950s.
Major indices achieved a remarkable feat last year, as the S&P 500 soared 28.9%. This was the best result since 2013 (up 29.6%). You’d need to go back more than 20 years to find a comparable result (1997: up 31%). Meanwhile, the Nasdaq leapt 35.2% and the Dow Jones rose 22.3%.
Now that 2019 is behind us, it is an opportune time to reflect on the key themes and talking points from last year, while also reviewing some key contributors towards the strong performance of the Global Growth Portfolio.
Markets responded favourably to the Fed reversing its course on monetary policy
One of the biggest developments of the year supporting strength in US equities was a shift in monetary policy from the Federal Reserve. In fact, this catalyst emerged in the first week of January 2019, when Jerome Powell calmed a market that had been beset by fear until that point.
While the Fed raised interest rates on four occasions in 2018, up to a benchmark of 2.5%, the central bank reversed course in 2019. Policy makers adopted a dovish outlook, slashing rates three times and now indicating a desire to pause.
Lower interest rates encouraged investors to shift capital into the stock market in search of more lucrative opportunities. It also provides corporate America with the prospect of a better long-term growth profile courtesy of cheaper access to debt, thereby underpinning equities.
Trade anxieties occupied investors but didn’t materialise into a telling issue
Although there were periods during 2019 where the market became concerned by increasingly threatening trade rhetoric between China and the US, by the end of the year, investors all but dismissed this issue.
It stands to reason that the market saw through the gamesmanship between the parties, remaining largely unaffected by the issue dragging out. At the same time, the impact of the trade war didn’t really translate over to stock performance, as numerous bellwether companies operating in China showed robust signs of growth.
Sectors that were expected to be hit hardest ended up posting some of the best-performing results across the market. This includes chip developers and IT consumer stocks. In fact, tech stocks were the main driver of the market’s record-breaking run in 2019, which we’ll look at shortly.
Outside of US-China conflict, there were other hiccups along the way. These included import tariffs being imposed on metals from Brazil and Argentina, trade spats with European allies, and even the threat of a NAFTA break-down. However, the localised nature of these events were only felt temporarily and didn’t have a lasting role in quelling positive market momentum.
Soft economic conditions failed to diminish market sentiment
Although many companies traded with record levels of debt and lofty valuations throughout 2019, a subdued US economy did nothing to deter investors.
An inverted yield curve frightened markets in August, leaving some analysts to speculate that a recession might be on the cards. However, despite its softness, the economy is still in a modest position.
Indicators like retail spending and jobs growth are tracking strongly. With the fall-back option available for the Fed to cut rates further to stimulate growth, the market has overlooked weak areas of the economy like manufacturing.
Global Growth Portfolio: Major movers throughout 2019
Thanks to their strong performances, Apple (APPL) and Microsoft (MSFT) made up 15% of the S&P 500’s total gains. Apple surged 86.7% last year, while Microsoft delivered shareholders a return of 55.7%.
The significant gains notched up by Apple show that it remains a highly resilient business, even amid challenging economic conditions. At the start of 2019 the company shocked investors with an iPhone sales downgrade.
However, since then, Apple has energised its focus beyond a saturated smartphone market. Other divisions within the company are firing on all cylinders. IPad sales were up 16%, wearables and accessories like the Apple Watch and AirPods grew by 41%, and services revenue lifted 16%.
The company’s ability to move seamlessly into new growth channels cannot be questioned. Wearables are tracking at record levels in each of Apple’s global markets. Given these offerings are still in their infancy compared with the strong legacy that the iPhone has enjoyed, it sets the tone for a bright outlook. Even now, iPhone sales are starting to show signs of improvement too.
Meanwhile, Microsoft’s Azure cloud-computing segment and push towards subscription-based offerings have underpinned significant growth. Cloud computing remains a robust business area as more clients turn towards efficient and dependable remote solutions. It is an area that was unaffected, if not came to life in last year’s subdued economic environment.
Microsoft has also been gaining ground on category-leader Amazon (AMZN), with Azure sales growing at a higher rate than that of Amazon Web Services. As the company continues to secure significant contracts with key government clients, and also smashes profit forecasts as it did in the September quarter, the company’s growth prospects remain compelling.
In the same space, it was no surprise to see ServiceNow (NOW) perform strongly. On the back of its exponential earnings growth, the stock climbed 58.7% last year. With proven expertise at cross-selling, and high client retention, sales prospects are underpinned into the mid-term.
Across the entire S&P 500, Advanced Micro Devices (AMD) finished the year as the leading stock, posting gains of 160.2%. This was the second year in a row where AMD topped the index’s best performers.
One of the leading catalysts for AMD’s strong run was a broader pick-up in industry activity, with a spate of new products also spurring customer demand.
AMD released various chips to compete directly with Intel (INTC), yet by competing on price, AMD has been able to capture market share from its rival. The business has retained and even won key contracts with major players in the computing and gaming console segments, including Microsoft.
Also caught up in the broader strength of the semiconductor and chip maker segments was Skyworks Solutions (SWKS), which rose 78.7% in 2019. Surging expectations for demand growth to be fuelled by the next-generation of 5G phones helped provide the impetus for a stellar run.
Elsewhere, Nike (NKE) gained 36.8% as the company continued to surpass sales and earnings forecasts. The strength of the firm’s Chinese sales were a standout factor in the rising share price, especially in light of trade anxieties weighing on consumer sentiment. All the while, the company’s market share in footwear and apparel remains in single digits, leaving plenty of growth upside.
Finally, Visa (V) managed to post a sizeable gain of 42.3% last year as industry tailwinds supported the company’s share price. As more consumers shift to online shopping, debit and credit card usage remains at high levels in the US, which is allowing the company to continue pushing earnings growth. Visa has also entrenched its position in the market and fought off emerging competitive threats, while business-to-business looms as a potentially lucrative upside that is capturing market interest.
International
Global Growth Portfolio
The portfolio gained 0.3% during December.
Equities within the portfolio comprehensively outperformed the broader market, delivering a gain of 4% in Net Asset Value (NAV) across the month. In contrast, the Nasdaq lifted by 3.5% and the S&P 500 grew 2.9%.
While underlying performance was strong, portfolio growth was offset by unfavourable currency movements. The USD/AUD forex rate fell sharply from 1.4784 to 1.4251. This dragged on portfolio assets by 3.7%.
Continuing their strong run, Apple (APPL) and Advanced Micro Devices (AMD) were once again the top contributors towards the performance of the Global Growth Portfolio.
Apple shares climbed 9.9% last month as expectations grew that the company would benefit from a bumper holiday season. Demand for AirPods and Apple TV+ are forecast to provide a huge tailwind for the business. The interim trade deal struck between China and the US also supports growth prospects.
Meanwhile, AMD shares leapt 17.1% and reached an all-time high. The chip maker’s improving competitive position in the market remains a compelling driving force behind strong support from institutional investors.
Another leading stock last month was Skyworks Solutions (SWKS), which delivered robust gains for the portfolio. The company, which sells most of its semiconductors to Apple, saw its market cap rise 23% during December. With 5G likely to herald an increase in communications infrastructure from mobile device manufacturers next year, the company is well positioned for sales growth.
Call options sold against AMD, Nike (NKE) and Zillow Group (ZG) last month were closed out, with a negligible impact on the portfolio. The corresponding equity holdings in Nike and Zillow Group performed strongly across December and realised modest profits upon sale.
Unrealised income accounted for 17.5% of all assets at the end of December, up from 15.2% at the start of the month.
We are currently paying close attention to the escalating tension in the Middle East between Iran and the US. It is our intention to manage equity weights and portfolio risk cautiously amid the prospect of increased volatility.
Australia
Australian Yield Portfolio
The portfolio fell 1.2% last month, however, this was a superior result to that of the ASX 200, which dropped by 2.4%.
Given the broad-based sell-off across the market, most equities within the portfolio were subject to selling pressure. There was only one stock to trade ex-dividend during December, with Stockland Corporation (SGP) declaring a dividend of $0.135 per share.
There were two standout stocks within the Australian Yield Portfolio during December.
Leading the way, oOh! Media (OML) jumped 16.3%. The majority of the outdoor advertising and media company’s gains came after it issued an operational update that included an upgraded EBITA guidance. With trading conditions improving, the company’s high-growth outlook is one of the reasons we believe OML will be able to grow dividends over time.
The other notable performance came from Magellan Financial Group (MFG). With gains of approximately 150% across 2019, the fund manager is carrying significant trading momentum into the New Year. Another impressive update on funds under management suggests the firm has more growth ahead. MFG shares rose 8.5% in December, with the stock trading on a dividend yield above 3%.
Telstra (TLS) and Regis Healthcare (REG) weighed on the performance of the Australian Yield portfolio, falling 8.3% and 17.5% respectively.
In the case of Telstra, there was no price sensitive news to spark the fall, rather, we believe investors took the opportunity to lock in profits after a strong run. The impending roll-out of 5G stands as a potentially lucrative opportunity to support capital appreciation and steady dividends over the mid-term.
Regis fell sharply after downgrading its FY20 guidance due to declining aged care occupancy rates. Challenging industry conditions are something that give us concern, so we intend to review this exposure more closely. We do recognise that some of the negative sentiment attached to the Royal Commission into Aged Care may pose a near-term headwind, however, much of this should be priced in.
Due to the low liquidity over most of the month, we refrained from adding any new positions to the portfolio. Our cash holdings still represent 23% of all portfolio assets. It is our intention to continue exercising particular caution while considering allocating any capital towards new positions.