Developed Markets Finish the Year Strong
In the month of December, international developed stock markets gained 3.19%. The U.K. and Europe ex U.K. equity markets recorded returns of 5.15% and 3.47%, respectively. Pacific ex Japan and Japan lagged the broader markets. The U.S. market finished the year up 30.88% and international developed markets rose 22.49%. While these returns are sizable, much of the gains in 2019 were due to multiple expansion and not earnings growth. Returns primarily from multiple expansion are not sustainable, and investors should not extrapolate these high returns.
Emerging Markets Rally in December
Broader emerging markets rose 6.96% for the month. Brazil and Korea posted gains of 12.34% and 10.08%, respectively. India and Mexico lagged other markets in December. Emerging markets recorded a 2019 return of 20.11%, but still trade at attractive valuations relative to the U.S. market. Using the CAPE valuation ratio, emerging markets are trading at an approximately 50% discount relative to the U.S. market. Using the trailing 12-month PE ratio, the discount is approximately 38%.
Energy has Relatively Tough 2019
Energy and information technology recorded gains of 5.59% and 5.01%, respectively, in December. Industrials and consumer staples lagged other sectors. Much of the 2019’s return has been driven by technology companies and other cyclical sectors. Energy trailed other sectors in 2019, returning 11.66%.
Momentum has Strong Month
In December, value outperformed growth in the small-cap space, but underperformed in the large-cap space. Momentum recorded a gain of 3.40%. In 2019, value underperformed growth in the U.S. market, but still returned a respectable 26.54%. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.
Value Outperforms in International Markets
In the international developed markets, value outperformed growth in the large-cap and small-cap space. Momentum recorded a modest gain of 3.41% while small-cap emerging market stocks returned 6.70%. The divergence of performance between growth stocks and value stocks has been more muted in the international markets relative to the U.S. market.
Savers Being Pushed Out on the Risk Curve
In December, the three-month Treasury bill index returned 0.14% for the month. The index’s 2019 return is 2.28%, keeping pace with inflation. Today’s low rates are forcing savers to invest in riskier assets just to maintain purchasing power. The CPI increased by 2.06% year over year through November.
Interest Rate Risk and Credit Risk Paid Off in 2019
The returns of deflationary hedges were mostly flat or negative for the month. High yield and leveraged loans returned 2.09% and 1.60%, respectively. The Bloomberg Barclays U.S. Agg Bond Index returned -0.07%. Emerging market bonds had a strong 2019, returning 14.42% for the year. While spreads have tightened due to strong performance, the emerging market debt asset class still yields approximately 4%-5%.
Gold has Solid 2019
Inflation-sensitive investment returns were mixed for the month. Crude oil and the Alerian MLP recorded gains of 11.05% and 8.53%, respectively. In 2019, U.S. and international real estate posted returns of 23.10% and 22.44%, respectively. Natural gas and inflation-indexed bonds have lagged. Gold bullion returned 18.34% in 2019. Interest in gold has increased as recessionary concerns linger. Central banks, especially in emerging markets, continue to increase their gold holdings, reaching a twenty-year peak. Late cycle risks, low and negative real interest rates, and geopolitical risks are some of the reasons gold is attracting the marginal investor.
U.S. Dollar Mixed Versus Other Currencies
Over the past three months, the U.S. dollar appreciated against the Japanese Yen and Indian Rupee but depreciated against most other major currencies. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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