To wind up the year we decided to take a tongue-in-cheek look at the year that was. There were a number of predictions being widely thrown around by those in the industry to start the year, unfortunately many of them turned out to be unfounded. So, let's dive into 2019 in review!
Wow, it's the end of 2019 and, while a full year has passed, it seems like yesterday that the markets were supposedly melting down after a ten year upward trajectory. A meltdown that thankfully never eventuated and (hopefully) will not be forthcoming in the near future. Granted, hope is a rather perverse emotion when it comes to looking at the markets objectively, but then again it is Christmas and we would rather end on an optimistic tone. Below are some predictions for 2019 that we never made but have been everso forthcoming by our esteemed counterparts in not only the financial press but the buy-side at large.
Prediction 1 - Central bank policy will reverse course and normalise
There was a healthy debate on this one in the TAMIM office leading into 2019, ultimately we came to the conclusion (by a narrow majority) that it would not be the case. It would be fair to say that, given Powell’s past and rhetoric in the lead up to taking his place as the Fed chair, most in the industry expected a clear break from the policy of his predecessors. While it did seem to have substance, this did appear rather presumptuous in retrospect. A freeze in the overnight credit markets and a rather bloody market sell-off and it seemed that they blinked immediately. As we have been saying consistently throughout, monetary policy is caught between a rock and a hard place so to speak. They will not only find it exceptionally difficult to reverse course but, in the absence of any catalyst, will find it hard to substantiate a normalisation of rates or the balance sheet.
This trajectory/trend has now come closer to home where the RBA not only lowered the cash rate to historically abnormal levels but might very well undertake unconventional measures in the forthcoming year. It seems that Central Bankers having weak legs is a global phenomena. After all, it took Lowe a good two months from categorically ruling out QE to coming down to “maybe, it’s in consideration”. We wait with bated breath for him to throw the ball firmly in the governments’ court and blaming a lack of fiscal stimulus for any market corrections in terms of real assets.
In essence, the pundits were right, they did reverse course but unfortunately for that particular prediction it was a 360 degree turn and the end result is the same old, same old. While it was not called QE, the actions by the Fed in September this year with regards to the Repo markets came quite close to it (as we pointed out). As a gentleman that we were speaking with put it: “If it looks like a duck, swims like a duck and quacks like a duck…”
Prediction 2 - Active Management is dead
Here is one that we never hear the end of. It seems that because of the underperformance of a great deal of active managers in the current market environment, the whole industry is in decline and does not add any value. The problem is, this is contingent on time frame and how you look at it. Yes, value managers have found the current environment quite hard to perform in but that is just one component of the entire active management industry. As we have consistently said, different styles work in different contexts. Try looking at the performance of growth managers over the past ten years. Then it seems the counter argument is over the very long-run, the market outperforms. And here there is substance, because markets can survive centuries but managers unfortunately are constrained by a little thing called lifespan.
For us, maybe it did prove correct. Our benchmark in Asia is up 14.95% and we only did 17.72% (CYTD at 30 November 2019), a negligible performance if you ask me. This is even more so in our domestic equities portfolios where the ASX 300 is up 26.33% in 2019 so far and we have only managed a paltry net return of 53.52% in our Australian All Cap strategy (at 30 November 2019), an even greater gross underperformance. We would formally like to apologise for being foolish enough to attempt active management.
Humor aside, we still firmly believe that (taking away market context) there is always a place for human skill and intellect when it comes to managing portfolios. Think about the market as an ocean with currents, rising and falling tides. The key is, it is all well and good to go up on a rising tide, but it pays not be left standing naked when the tide retreats - that is where a good active manager might help.
So... Active management is dead, long live active management!
Prediction 3 - Trump will act like an absolute statesman as he grows into the role
Alright, no sane person quite made this particular prediction. But in all honesty, the Trump presidency has created significant buying opportunities for the markets. Not for the reason he seems to think but the sheer impact the Tweeter-in-Chief has had on day-to-day market sentiment. The key to understand is that most of it might be noise and look to the fundamentals or the outcomes. In terms of trade, most of the negotiations when it comes to details are ironed out behind closed doors by the likes of Lighthizer and his counterparts in Beijing with, in all seriousness, very little input from the President and we would go so far as to say, intentionally so. The mood of most the chaps at the US State Department is not likely to be nearly as hawkish as the President might like to make it seem.
As far as we are concerned they have done an exceptional job in terms of navigating the intricacies of the phase one deal despite their top man seemingly working against them. This issue will not have a short-term solution but will lead to a gradual disentanglement of supply chains which, for the discerning investor, creates massive opportunities. Mayhaps a bit of active management might be required picking the right sectors and companies within them?
Aside from trade, the very nature of the Trump Presidency and its divisiveness is, believe it or not, not necessarily a bad thing. We got the corporate tax cuts and the sugar high as a result, deregulation that is (in the very near term) great for the markets. Sometimes, politicians not being able to do much as a result of legislative gridlock is a blessing in disguise. Mayhaps, the logic here is, the markets got what they wanted and might be happy to let Capitol Hill bicker over everything else so that on the flip-side there is at least a guarantee that there won't be policy shifts that will be detrimental for the markets in the medium-term.
Prediction 4 - The property market is in for downturn
Simply put, nope. Didn’t happen and in the absence of a surprise economic downturn, not likely to happen. Granted, there might be headwinds that lead to certain dislocations, namely fluctuations in credit growth, but property prices are rather sticky even in a downturn. We continue to see steady population growth in metropolitan areas, especially on the Eastern Seaboard and to a lesser extent Tasmania. We might not necessarily achieve the same returns that we have been used to in the past but the quest for yield when the risk-free rate of return (i.e. RBA Cash Rate) is zero-bound should allow the market to steady. In some cases the opposite has been true with some of the best performing sub-groups of the ASX being REITS which have seen their yields compressed but their valuations appreciate to historic levels.
We firmly believe that continued consolidation of the property market will create opportunities especially within commercial and industrial contexts. And, as we have demonstrated with our recent property transaction, you can still sustain a reasonable yield on a risk-adjusted basis if you are discerning about the matter.
Prediction 5 - We are in for another GFC
History is an interesting thing. As humans, our minds tell us to look for similarities in various situations in order to draw meaning and provide some semblance of a clue as to what is going on. After all, this is the reason why when we are young and shown a cat we are then able to extrapolate that information and look at other cats and know they are cats. It is why we think of a lion or tiger as a big cat and not a (house) cat as a small lion/tiger, context and reference points are crucial. Same with history, however there is a limit, history rhymes but it does not repeat. It is understandable that people have a sour taste in their mouths following the GFC and what that did to their wealth and savings. Trying to find similarities between now and then and making predictions that, just because there are some correlations, we will have the same outcome is a rather futile exercise. Correlation is not causation as my statistics professor used to say. As the graph below shows, if that were the case, than the rise in average global temperatures is a direct result of the fall in piracy.
That is not to say that we are suggesting there will never be a market correction but trying to time it or predict when it might be is a rather pointless exercise. More people have lost money trying to time the market than they have by staying invested through the tough periods. How many people panicked and went to cash (or a significant cash position) at the beginning of this year? And what did the market return this year? We can learn from history and understand the causes of specific events and identify catalysts that might be similar in nature so as to avoid them. We do so by being rational and reasonable, having a diversified portfolio across geographies and asset classes. When we say that, we are not talking about having a bunch of underperformers that hammer returns but true diversification where one can reasonably justify lower correlation.
We end our little tongue-in-cheek tirade with one final remark:
Markets are great at head-faking people, just when you think you understand them they shape-shift. The key is to enjoy the new shape and, if you can or if you’re really good, see what the next shape might be. If you’re not, just enjoy the spectacle.
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