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.


Fear is good if you are not part of the herd


Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates


How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, stay connected with friends and the community ... should you defer retirement or just do it?


Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.


Why short-termism is both a travesty and an opportunity

On any given day, whether the stockmarket rises or falls is a coin toss, but stay invested for 10 years and the odds are excellent. It's at times of market selloffs that opportunities present for long-term investors.

Investment strategies

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

No excuses: Plan now for recession

The signs of a coming recession are building, especially in the US. In personal and business decisions, it's time to be more conservative and engage in risk management until some of the uncertainty is resolved. 


The fall of Volt Bank removes another bank competitor

The startup banks were supposed to challenge the lazy, oligopolistic major banks, but 86 400, Xinja and now Volt have gone. Why did Volt disappear so quickly when it had gained deposit support and name recognition?


Three main challenges to online ads and ‘surveillance capitalism’

Surveillance capitalism refers to the collection and use of consumer data to further profits. Will a renewed focus on privacy change the online-ad business model, or is it too entrenched?



© 2022 Morningstar, Inc. All rights reserved.

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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.