Economic growth cooled off worldwide in 2019. After a period of ample growth in the real gross domestic product (GDP), US growth weakened somewhat to 2.1% on an annual basis while Eurozone growth slowed to 1.2% on an annual basis. This was due to, among other things, the uncertainty caused by the US-China trade war, which dampened both readiness to invest and the growth in world trade.
This has affected particularly the industrial sector, while the services sector - much more dependent on domestic demand - in fact continues to do relatively well. The strong labour market and high consumer confidence still support consumer spending in the developed world. Because unemployment is now very low, job growth is declining, however, and growth in consumer expenditure will increasingly have to come from wage growth. Wage growth has been picking up in both the Eurozone and the US since 2018, and is now at over 2% on annual basis in the Eurozone and over 3% in the US. The outlook for consumer expenditure consequently remains reasonable. The likelihood of a chaotic no-deal Brexit appears to have decreased significantly in the UK. In the UK elections last December, Boris Johnson managed to win a large majority in Parliament, allowing him to easily pilot the exit agreement concluded with the EU through Parliament.
The expectation at the beginning of 2019 was still that the US and Eurozone central banks would raise policy interest rates (further) in 2019, thus prompting a continuation of the normalisation of the monetary policy. As a result of a cyclical slowdown in growth stemming mainly from increased uncertainty due to the US-China trade war, in combination with the lack of any noteworthy increase in inflation (forecasts), the policy interest rates were in fact lowered. The US central bank labelled it a ‘mid-cycle adjustment’ and lowered the interest rate three times by 25 basis points. Liquidity in the financial system was also increased. The ECB decided in September to not only lower the interest rate, but to also resume its bond-buying programme (for 20 billion per month).
Declining interest rates
The prospect of interest rate cuts by the central banks ensured that at the beginning of the year, equities markets made up much of the price drops of the last quarter of 2018. Later in the year, the prospect of a (partial) trade agreement between China and the United States caused price gains to be expanded. Equities markets in developed countries ultimately booked gains of almost 30%. Emerging markets booked gains of over 20%.
The low interest rates had already anticipated the policy turnaround by the central banks, and a decline set in from autumn 2018 onwards. For 2019 as a whole, the German 10-year interest rate fell 45 basis points to -0.20%. A level of -0.71% was reached in the interim, followed however by recovery. The 30-year swap rate was briefly negative for the first time, but finished the year at 0.60%. The decrease in long-term interest rates ensured that bonds achieved a positive return.
Rising oil price
Brent oil started the year with a substantial increase. Inventories decreased, due to sanctions the United States imposed on Venezuela, among other reasons. The oil price continued to rise over the course of the year, due in part to attacks carried out on two important oil installations in Saudi Arabia. The installations - which accounted for 50% of Saudi oil production - were quickly repaired, however, causing the price shock to disappear. The rise in the oil price continued at the end of the year. Commodities investors invest in forward contracts. Before the expiration of the contract, it is sold and new contracts with a longer term are bought in, a process that repeats itself monthly. Because of the lower inventories, forward contracts are in backwardation, meaning that the price of future contracts is lower than the spot rate. This generates a positive roll yield.
The total return on client investment portfolios was positive. All asset classes except for currency hedge and inflation instruments contributed positively. Equities, commodities and listed property saw the highest returns. Government bonds and interest rate swaps, among others, likewise achieved a positive return. At the same time, the long-term interest rates in the Eurozone decreased, pushing up pension liabilities (what we need to pay to pensioners in the future and currently).