US-China trade tensions. Brexit. Fears of a global recession. Drone attacks on Saudi Arabian oil refineries. Donald Trump becoming the third US president to be impeached by the US House of Representatives. For stock market doomsayers, 2019 provided plenty of excuses to stay on the sidelines.
In doing so, they missed out on what is on track to be the biggest surge by stocks globally in a decade, led by US equities, which are enjoying their longest bull run in history.
"In any year, you'd expect to see a 10 per cent correction [at some point in stock markets]," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments. "What was unusual about this year was that we had none – so far."
The MSCI All World Index, which tracks stocks from 23 developed and 26 emerging markets, is up 23 per cent since the end of 2018 and hovering around all-time highs, with only a few days trading left before year end.
The S&P 500 in the United States, which sets the tone for markets globally, passed a landmark in August as it recorded its longest rally, having gone 9½ years without a fall of at least 20 per cent.
The gauge is up more than 27 per cent so far this year, the most since 2013, and has been scaling new highs every other day recently. Index members like retail giant Target and printer maker Xerox have almost doubled in value in 2019 and iPhone maker Apple has gained nearly 80 per cent.
Closer to home, the pan-European Stoxx 600 is also at a record high after surging 23 per cent in 2019. Dublin's Iseq, one of the most beaten down national equity benchmarks last year given its sensitivity to Brexit, has rallied 30 per cent in 2019, driven by gains of about 50 per cent by heavyweight stocks CRH and Smurfit Kappa.
Bit left to run
The consensus view among market strategists and analysts is that there is a bit left to run, even if the bull market is living on borrowed time, propped up by central banks.
With market crashes following the 2000 dotcom crash and the bursting of the global credit bubble in 2008 still at the back of investors’ minds, few are openly uttering the four most feared words in investing: “this time it’s different”. But investors are buying into this view nonetheless.
Following an easing of global growth in 2019, economists at Wall Street giant Morgan Stanley are predicting a "mini-cycle recovery" next year, the third in a decade of broad expansion. Threats of overheating during the period were curtailed by the euro zone debt crisis in 2011, China's slowdown in 2014 and, most recently, international trade tensions under the Trump administration, according to the bank.
The friction has eased in the past week with Trump and Beijing officials announcing a “phase one” trade deal – even if critics have slammed it as little more than window dressing as talks on more contentious issues, such as state Chinese subsidies and digital trade, have been deferred.
“The funny thing about this cycle is that it’s a very mature cycle but it’s also been pretty tame by historic standards,” said Des Lawrence, senior investment strategist with State Street Global Advisors in Dublin. “Normally you get more aggressive bounces and that can see consumers spending more aggressively – and then you get your classic interest rate hikes to kill that off.”
That hasn’t happened this time around, he said.
"Are US consumers heavily indebted? Not by historic standards. Are savings rates solid? Yes. The market can still go on a bit, despite it being mature. We're not seeing the animal spirits that we saw in equity markets a year and a half ago when the FAANGs were pushing it," he said, referring to the market acronym for tech giants Facebook, Amazon, Apple, Netflix and Google (whose parent group is Alphabet).
Wobble But it wasn’t, of course, one uninterrupted upward march by equities in 2019. There was a bit of a wobble globally in May amid investor nervousness as Washington and Beijing engaged in tit-for-tat trade tariff moves. Sentiment in Britain and Ireland was further dampened following the resignation of Theresa May as British prime minister after she failed in three attempts to get her EU withdrawal agreement through parliament in Westminster.
Equity markets turned jittery again from late July to mid-August on heightened fears over global growth as industrial production in Germany, Europe’s largest economy, dipped and, more worryingly, the market interest rate, or yield, on US 10-year government bonds dipped below the two-year rate for the first time since 2007.
This phenomenon, known as an inverted yield curve, is widely seen as an indicator of an upcoming recession. It also emerged in September that US manufacturing had contracted in August for the first time in more than three years.
Central banks came to the rescue in September, with the European Central Bank (ECB) cutting its deposit rate to minus 0.5 per cent and announcing that it was restarting its quantitative-easing bond-buying machine. It had spent €2.6 trillion over almost four years before the previous programme ended in 2018.
The US Federal Reserve lowered its rates days later, following on from its first cut since the financial crisis in July. It would go on to reduce rates for a third time in October.
Geopolitical developments also helped in October as Trump played up the prospect of a phase one trade deal with China and Boris Johnson struck a fresh Brexit withdrawal deal with the European Union.
The stock market surge that ensued fed on itself. An influential Bank of America Merrill Lynch survey reading for November showed that investors were switching out of cash and into stocks at pace. BofA Merrill Lynch investment strategist Michael Hartnett put it down at the time to a classic case of investor FOMO – the fear of missing out.
Still, the stock market performance of 2019 has taken place against the backdrop of little or no profit growth by listed US companies, with investors being prepared to put a higher value on earnings.
In Europe, earnings downgrades by analysts have outnumbered upgrades since April.
S&P 500 stocks are currently trading on about 18 times analysts’ earnings estimates, up from the 10-year average ratio of just under 15, in the hope that profits will pick up in 2020.
“Equity markets are a little expensive in some cases,” said Milligan at Aberdeen. “But the US market is not trading at 25 times. It’s not going into bubble territory. In many markets around the world, valuations are justified with modest growth and profit improvement. But next year has to be a profits year.”
Market analysts currently see companies on the S&P 500 posting average earnings growth of 9.3 per cent next year, while those on Europe's Stoxx 600 are projected to see profits rise by 8.9 per cent, according to Bloomberg data. There's little room for disappointment.
There is no shortage of other potential banana skins for markets, according to analysts. These include a potential re-escalation of the US-China trade war, which could deliver a fatal blow to global business confidence; central banks beginning to raise rates and tighten other monetary policy measures too soon; or a surprising event like the drone attacks in September on Saudi Arabian oil facilities which temporarily halved the country’s oil production.
Then there are geopolitical risks, ranging from a chaotic Brexit, fears of which were reignited by Johnson this week as he said he planned to legislate to prevent an extension of the transition period beyond 2020, to an escalation of unrest in Hong Kong triggering an aggressive response from Beijing.
Nightmare
Meanwhile, the nightmare scenario for Wall Street types is of a left-wing US Democrat, such as Elizabeth Warren or Bernie Sanders, being elected president in November and taking aim in their policies at banks, billionaires and Big Pharma.
Still, for stock market Cassandras prepping the obituary for the longest cycle, Andrew Pearse, global head of investment strategy at Russell Investments, had one piece of advice in a recent note to clients last week.
“Hold the epitaphs: this ageing cycle seems likely to last beyond 2020,” said Pearse. “Central bank easing, the de-escalation in the trade war and tentative green shoots in global manufacturing suggest we might be in the cusp of another ‘mini-cycle’ recovery through the first half of 2020.”
There is little doubt, however, that market bulls are playing in extra time.
“Economic slack, however, is limited at this advanced stage of the cycle,” Pearse conceded. “Nowhere is this more apparent than in the United States, where the 3.5 per cent unemployment rate for November 2019 is at levels last seen in the 1960s and wage pressures are building.
“Tighter monetary policy will eventually be required, either by late 2020 or early 2021, which we believe should ultimately push the global economy into recession.”
Best year since 2013 ... but ISEQ’s revolving door continues to spin
Dublin's Iseq stock index, on track this year for its best annual performance since 2013, saw one initial public offering and two companies depart into private ownership as the market's revolving door continued to spin in 2019. INM Independent News & Media was forced to disclose to the stock market on April 5th that it was in takeover talks, after The Irish Times reported that its then chief executive, Michael Doorley, had raised the prospect of a sale of the newspaper group in meetings with members of the Dublin investment community.
Within a month, the company agreed to be taken over by Mediahuis, a company that owns newspapers in Belgium and the Netherlands, for €146.5 million.
The deal saw businessman Denis O’Brien, who is estimated to have spent over €500 million building up a 29.9 per cent INM stake between January 2006 and the end of 2013, crystallise a loss running into hundreds of millions of euro as he received €43.5 million from Mediahuis.
Financier Dermot Desmond is believed to have broken even as he received €21.8 million for his 15 per cent stake.
However, beef baron Larry Goodman made €800,000, or a 35 per cent return, on the €2.31 million he had spent last year accumulating a small stake in INM.
GREEN REIT Green Reit, the first property trust to launch on the Dublin stock market when it floated in July 2013, was also the first to signal it had had enough when it put itself up for sale in April, bemoaning how investors had persistently failed to recognise the company's real value.
Founded by Stephen Vernon and Pat Gunne, the company struck a deal in August to be acquired by UK property group Henderson Park for €1.34 billion – a 25 per cent premium to where it was trading before the for sale sign was hoisted.
The sale process also lured Larry Goodman onto the pitch, with his family investment vehicle, Vevan, spending about €63 million on Green Reit’s stock within two months.
Seasoned market observers questioned the logic of the businessman spending up to €1.82 per Green Reit shares at the time – within a whisker of the €1.83 net value per share that the property group had put on its assets as of December.
But Henderson Park’s €1.9135 per share bid delivered a gain of about €4 million profit for Goodman.
UNIPHAR After 2018, when a number of Irish companies postponed plans for initial public offerings amid general market malaise, healthcare services group Uniphar took advantage of a recovery in investor sentiment to float in July – just before markets staged something of a mid-year mini-wobble.
The deal raised €139 million for the company, which was formed in 1994 through the merger of United Pharmacists Co-op and Allied Pharmaceutical Distributors. Having undergone a shift in focus in recent years, the company makes two-thirds of its earnings from two high-growth divisions.
These are commercial and clinical, which helps pharmaceutical companies and medical device manufacturers with marketing and distribution, and product access, which sources and supplies unlicensed medicines for retail and hospital pharmacy customers and manages the release of speciality medicines for drug-makers to approved patients.
Last month, the company committed €40 million to two deals – buying medtech service provider EPS Group, which has units in Sweden and Finland, and Ireland-based medical device distributor M3 Medical.
Uniphar’s stock has advanced by almost 6 per cent since it floated at €1.15 a share.
