What follows after the unusual 2019 stock market year?

2019 started turbulently. An inverted yield curve indicated a recession triggered by the US-Chinese trade war. In the United States, a severe dispute between the US Federal Reserve Bank (“FED”) and the US President raged about the right course in interest rate policy, and China’s economy showed signs of weakness. In Europe, it was once again the UK (with the perennial issue Brexit) and Italy (with breaches against the EU budget rules) which kept investors busy and caused many of them to sell securities in anticipation of a significant correction. 

However, the countermeasures showed results: Instead of planned interest rate hikes by the FED, three rate cuts, economic stimulus programs in China, and the first positive results from the trade dispute brought investors back to the markets, and finally led to one of the best stock market results of the last years; even in Germany, albeit this was fundamentally undeserved considering the lack of economic dynamics and the weak profit development of German companies. 

What’s next in 2020? To a greater extent, investors are confronted with extraordinary risks (geopolitics, trade wars, political polarisations, high levels of corporate debt, and others) which do not really invite investors to increased engagement in the stock markets. The low-interest rates lead to carelessness by investors, and investments in unproductive projects and higher levels of debt by the companies, while those companies that do not depend on loans, further intensify their share buy-back programs. Also, for many US companies, the tax-related profits of the past years no longer apply, and this primary effect is no longer a value driver. 

On the other hand, a strong stock market year is usually followed by another one, particularly as it is a (traditionally strong stock exchange) US presidential election year with a President who will do everything for his re-election. The still high dividends and low-interest rates have a supporting effect on the stock markets. The US technology companies and their Chinese counterparts will continue to play in their league concerning disruption and dynamic growth. Japan celebrates its comeback to the investment portfolios, while in Europe the opportunities outweigh the risks of selected industries and titles. In addition to investments in stocks and selected corporate bonds, the division of asset allocation into alternative assets is essential, especially those which require thorough analysis and risk assessment, such as private debt and infrastructure. Gold as a crisis currency and insurance against troubled times should continue to be an integral part of the asset allocation. At the same time, selected investments in the crypto segment could also represent useful counterweights as uncorrelated asset. 

All in all, we could again see a positive result at the end of the year, albeit not as high as in 2019, provided that no massive exogenous shocks tarnish the picture. However, results will be achieved under even higher volatilities for which investors will need a good sense for the risks and steady nerves.