Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 293

How is 2019 different from 2018?

The central bank policy of 'quantitative easiness' has morphed into simply ‘queasiness’. Certainly, that’s an apt feeling among investors following sharp falls in risk asset prices in the last quarter of 2018, again bringing into focus the question of asset allocation for the path ahead. While many of the surprise falls reversed, at least in part, through January 2019, it’s important to consider what may have driven the sharp declines. Are they symptomatic of a more prolonged malaise or a temporary setback?

It’s hard to ignore the secular shift in the comparable risk/reward metrics of major asset groups. Sharemarkets rewarded investors almost without missing a heartbeat in the entire post-GFC environment, buoyed by central bank monetary stimulus. The combination of a stable tiller and cheap money was an intoxicating mix. But now, perhaps if the initial US experience is anything to go by, we’re seeing for the first time in a long while the impact of having ‘the training wheels off’ and of borrowing costs moving back to a more normalised level, on a jittery equity market.

Fixed interest became relatively more interesting

What we are faced with today is a shifting set of relative market dynamics combined with a much less certain political landscape, with neither being especially ‘equity friendly’.

One thing that is arguably different now as we contemplate future asset allocations is the risk premia or simply the forecast return spread between cash and bonds, and equities. The ~1% cash rate return of the past decade was utopia for equities. Dividend yields of 4% or 5% made them the darling of any asset allocators tool kit. But now that cash rates in the US exceed 2%, the equity dividend yield return spread is less attractive.

And that’s before we factor in the tailwind that a rising rate environment ultimately brings to sovereign and credit yields. There may be some pain as rates rise if duration exposure is left unhedged, but the forward-looking returns from those bond assets today look more appealing. US 10-year Treasuries continue to oscillate around the 3% mark, and investment grade credit yields sit comfortably above 4% at the medium-to-long end of the curve.

The chart below illustrates the forward-looking benefit that the combination of sporadically widening spreads and rising rates - which characterized much of 2018 - provides to bond investors. They give higher yields across the maturity curve with no discernible elevation in the level of default risk. Suddenly, an equity dividend yield of even 5% doesn’t feel quite as rich, and certainly not on a risk- or volatility-adjusted basis.

Investment grade corporate bond yield curve

Source: Bloomberg as of 31/12/2018 using Bloomberg’s BVAL USD US Corporate Investment Grade Yield Curve. The yield curve is constructed using USD senior, unsecured fixed rate bonds issued by US investment grade companies. 

All this in a climate of political instability brought about by populism and anti-globalism and protectionism with the power to materially disrupt global trade and harmony, and an increasingly embattled Donald Trump.

In 2018, defensive asset allocations won

After all the noise of 2018, those carrying the most defensive strategic asset allocations emerged victorious. It was a worthy reminder that through cycles there will always be periods where it pays to bias your objectives towards preserving money just as much as growing it. Regardless of whether risk asset volatility of the past couple of months proves to be temporary or more sustained, higher cash and bond yields signal a harder environment for equities to maintain the strong competitive edge that they have enjoyed over the past decade.

Chart 2: Short-term Treasuries top returns

However, our responsibility as investors to those that entrust their money to us means that we cannot sit idly by. This environment has developed as one where optimal balancing between prudent defense and sensible return-seeking becomes paramount.

To borrow from Nat King Cole, while there may be trouble ahead, we must face the music and dance. But perhaps from a safer point on the dance floor not too far from the exit should a hasty retreat become necessary.

 

James Bloom is Managing Director, Investor Relations at Kapstream Capital, an affiliate of Fidante Partners. This article is for general information, not financial advice. It has been prepared without taking into account any person's objectives.

Fidante is a sponsor of Cuffelinks. For more articles and papers from Fidante, please click here.

RELATED ARTICLES

5 insights that put market volatility in perspective

Is FOMO overruling investment basics?

Fear is good if you are not part of the herd

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.