Thursday, 23 January 2020
Written by Amirudin Hamid, Portfolio Manager of GAX MD
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All MYTHEO functional portfolios delivered substantial gains in 2019. Growth portfolio led by a gain of 20.24%, Income Portfolio added 9.64% and Inflation Hedge portfolio advanced by 18.01%. Despite the slowing economic outlook and rising political risks, many markets performed positively in 2019. Equity markets were positive in the first quarter, rebounding from the sharp falls at the end of 2018 and were helped by increasingly dovish comments from the US Federal Reserve. After some volatility during the summer, equity markets resumed their rise in the fourth quarter of the year.

‍CHART 1: Functional Portfolio Returns for 2019
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The GROWTH portfolio rose by 20.24% in MYR

‍The equity market wrapped up the year 2019 far better than the earlier year. The US market did well, as reflected by the strong performances of Vanguard Value ETF (VTV) and iShares Russel Mid-Cap Value (IWS), which both had gains of more than 25%.

Investment in Canada (iShares MSCI Canada ETF – EWC) performed even better than that of the US with 27.38% gains.

None of the ETFs within the Growth portfolio produced a negative return during the year. The Wisdomtree India Earnings Fund (EPI) performed the worst, but still inched up by 1.05%.

Risk-on mode was on the play for the whole of 2019. Even the countries that struggled with political baggage like the United Kingdom and Hong Kong still moved up quite impressively. iShares MSCI UK (EWU) was very volatile but advanced by a massive 20.10%. Although Hong Kong’s economy plunged into a recession, iShares Hong Kong ETF (EWH) still appreciated by 10.29% in 2019.

‍The INCOME portfolio rose by 9.64% in MYR

‍According to the market outlook by many research houses at the end of 2018, it was indicative that most didn’t expect 2019 to be a good year for bonds. Bond yields hit a new all-time low in 2019. Bond yields traded lower in tandem with the move by the Federal Reserve to reduce interest rates three times, starting from 31 July 2019.

The corporate bonds and long duration bonds were the outperformers. Ultra-low yield in the global government bonds increased the demand for corporate bonds. Hence, the yield spread between corporate bonds narrowed against government bonds. At the same time, long-term bond yields were falling as investors were more pessimistic about the US economic growth outlook earlier this year.

MYTHEO largest’s corporate exposure, iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) registered more than 18% return in 2019. Meanwhile, the 20+ Year Treasury Bond ETF (TLT) gained as much as 15.69%.

The INFLATION HEDGE portfolio was up by 18.01% in MYR

‍The Inflation Hedge portfolio was the best performing portfolio for the most part of the year before being surpassed by the Growth portfolio in November.

After many years in a down-cycle, commodities had a turnaround year in 2019. Gold performed well in 2019 due to rising geopolitical risks and the perception of central banks moving back towards Quantitative Easing policies. The oil price was volatile with strong gains in the first quarter followed by falls as the demand prospects weakened. Oil prices spiked briefly in September following the drone attack on Saudi Aramco's Abqaiq refinery, which is the world's largest oil processing facility.

Meanwhile, the US real estate market was boosted by a strong equity market performance and a low-interest rate environment. As a result, Invesco DB Oil Fund (DBO) gained 30% in 2019. The performances of real estate and infrastructure-related ETFs weren’t that far behind. iShares US Real Estate ETF (IYR) and iShares Global Infrastructure ETF (IGF) added 27.83% and 25.57%, respectively.

‍It must be noted that, the actual portfolio return to the investors is the combined weighted return from the allocation to each functional portfolio. For example, if an investor allocates the investment equally: 33.3% in Growth, 33.3% in Income and 33.3% in Inflation Hedge portfolio, the actual portfolio return is (33.3% x 20.24%) + (33.3% x 18.01%) + (33.3% x 9.64%) =15.96%.‍What’s Happening in The World Market in 2019?

‍Here are several key events that have had meaningful influence on the financial market performance in 2019:

22 March – US yield curve inverted for the first time since 2008 after the 10-year Treasury Note yields were lower than the 3-month treasury bill yield.
‍3 April – Carrie Lam’s government introduced amendments to Hong Kong’s extradition laws that would allow criminal suspects to be sent to mainland China for trial.
‍24 May – Theresa May announced resignation as UK Prime Minister. The effective date of resignation was on 7 June.
‍24 July – Boris Johnson was appointed as UK Prime Minister.
‍31 July – Fed cut interest rate for the first time since 2008 from 2.5% to 2.25%, eventually a second cut on 18 Sept, and a third cut on 30 Oct.
‍15 August – The US 10-year Note yield fell below the US 2-year Treasury Note yield.
‍14 Sept – Drone attack on Saudi Arabia’s refinery plant.
‍17 Sept – The height of Repo market crisis when the Repo rate spiked to a record high of 6.94%.
‍25 Nov – Pro-democracy won the general election in Hong Kong.
‍12 Dec – Boris Johnson and the Conservative Party won the UK general election.
‍12 Dec – US and China reached an agreement in the Phase 1 trade deal.

Even though 2019 was filled with bad news, it seemed strange that financial assets sailed smoothly throughout the year. Only a minor bump was seen from August to mid-September when the market turned volatile, which was driven by the fear of recession. In mid-August, the US 10-year yield dropped below the 2-year yield, leading to a scenario known as the inverted yield curve, which is historically a reliable forward indicator to predict an economic recession in the US.

Before anxiety was relieved, more trouble hit the market sentiment. The US banking sector fell into a mini-crisis after the US repo market was hit by an unexpected liquidity crunch in September that sparked a wild spike in short-term rates. At one point, the rates closed at a record high of 6.94%, breaching the upper limit of 2% to 2.5% target range set by the Federal Reserve.

Fortunately, the market correction did not last long. The equity market rebounded strongly after the yield curve returned to normal and quick action was taken by the Federal Reserve to stabilise the Repurchase Agreement (Repo) market.

The ongoing trade war, Brexit, and violent protests in Hong Kong were also keeping investors on alert throughout the year.

UK and Brexit seemingly hit a roadblock when Theresa May announced her resignation on 24 May. However, the gamble by her successor, Boris Johnson, who opted for an early general election and won it with a landslide victory, helped to cool down the sentiment surrounding the Brexit.

Hong Kong was in chaos after a series of protests triggered by the amendment of extradition bills. The business and tourism activities were severely hit to the extent that the Hong Kong economy plunged into recession in the third quarter of the year. But there is light at the end of the tunnel, the pro-democracy party’s landslide victory in the general election on 24 November, should at least put the protesters out of the street.

The trade war between the US and China contributed heavily to the ups and downs of the financial market performance. President Trump announced tariff hikes multiple times during the year. In the end, the negotiations between the US and China in the ‘phase one’ were good enough to avoid a further escalation in tariffs.
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Our Thoughts

‍Despite the slowing economic outlook and rising political risks, many markets performed positively in 2019. Equity markets were positive in the first quarter, rebounding from the sharp falls at the end of 2018 and were helped by increasingly dovish comments from the US Federal Reserve. After some volatility during the summer, equity markets resumed their rise in the fourth quarter of the year.

The US Central Bank’s easing policy was key in driving the financial market performance. The Federal Reserve reduced interest rates three times in 2019 after raising interest rates four times in 2018.

The crisis in the Repurchase Agreement (Repo) market was a blessing. Since 17 September, the Federal Reserve has taken various measures to create more liquidity and to stabilize the repo market.

In the process, the Federal Reserve pumped-up the liquidity in the market by printing more money and purchasing an estimated US$237 trillion in financial assets. Most economists consider this move as a new form of Quantitative Easing, which was stopped about two years ago.

The trade war spat between the US and China was mostly harmful to the market. However, it was ended in 2019 with a huge positive outcome after both parties reached an agreement in Phase 1 of a trade deal. up by 2.48% and the Inflation Hedge portfolio gained 6.47%. The returns for the stipulated period was positive across all functional portfolios despite the ups and down in month-to-month performance.

As we move into the year 2020, we expect a few headlines to dominate market events. These are key developments to watch in 2020:

• Phase 1 trade deal had been agreed upon and signed by the US and China. However, the deal can be revoked at any time if either party fails to fulfill the conditions in the agreement. Never expect US-China trade friction to disappear. More news is expected and anticipated on Phase 2.

• 2020 is the election year in the US. The election is scheduled to start on 3 November 2020. President Trump has been playing the election card to win over supports, this includes implementing new policies that are tough to its trading partners, including China.

• After the election, Boris Johnson has gained more control in the parliament. He has set a very tight deadline of December 2020 to negotiate a post-Brexit trade deal. Clearly, the Brexit tantrum is far from over and we can expect more volatility related to Brexit.

• Monetary policy had a significant influence on the financial market in 2019. The Federal Reserve reduced interest rates three times in 2019 and printed more money to stabilize the Repo market. The market is now expecting that the Federal Reserve will only cut interest rates once for the whole of 2020.

• 2020 started with a big confrontation between the US and Iran. Any development between the US and Iran will be closely watched in 2020.The trade war between the US and China and the development of Brexit will continue to be front and center in the market volatility in 2020. Politics will continue to heat up the financial market with the US presidential election due in November. We can also expect additional twists amidst the lowest point of the US-Iran relations.

The trade war between the US and China and the development of Brexit will continue to be front and center in the market volatility in 2020. Politics will continue to heat up the financial market with the US presidential election due in November. We can also expect additional twists amidst the lowest point of the US-Iran relations.

It is always difficult to forecast market movements in the coming year. Therefore, it is essential not to be too concerned with short-term volatilities or to try and time the market. Instead, we urge investors to adopt a long-term view while leaving it to MYTHEO to manage your investments.

‍NOTE:
Comments on the performance and operational status of each functional portfolio above are from our model portfolio throughout the month. MYTHEO customer’s personalized portfolio is derived from the combined weight of each portfolio. Therefore, the actual portfolio performance to the client is dependant on the weightage of each portfolio. The actual personalized return to each client can be calculated using this formula:
Return of Personalised portfolio = (Weightage in Growth portfolio x Return of Growth portfolio) + (Weightage in Income portfolio x Return of Income portfolio) + (Weightage in Growth portfolio x Return of Inflation Hedge portfolio).