If global markets were priced off headlines, they’d be deeply in the red as the first half of 2019 came to an end.
The trade war between the world’s two biggest economies seemed to ratchet up on a monthly basis; a hundred billion in tariffs here, a hundred billion there and pretty soon you’re talking serious disruption.
Economic data was generally disappointing, big economies were slowing and all sorts of recession precursors were flashing amber.
Inverted bond yields were threatening to make an appearance on popularist current affairs TV programs – OK, that may be taking it too far, but you get the gist.
Staring down the maelstrom of negativity, global markets have produced one of the most lucrative first-half rebounds on record.
It is not just one asset class, it has been across all sectors – something few investors would have predicted as many assets, including US equities, were tumbling into the clutches of bear markets on Christmas Eve.
Stocks, bonds, commodities, Greek banks – you name it, they’ve been scooped up by investors.
A lot of that has to do with the dire situation markets found themselves in at the end of 2018.
Global equities have gained $US8 trillion ($11.43 trillion) since the start of the year, but that’s still a trillion or so shy of where they were 12 months ago.
Things are not getting better, why are markets?
The odd thing is the fundamentals haven’t improved; data is still disappointing, manufacturing heartlands are suffering from a mild infarction, global trade is slowing and central banks are cutting rates in the expectation things will get worse before they get better.
“The last time gains were so broad was in 2009-2010, when the global economy was recovering post-Lehman [Brothers collapse], the Fed implementing QE [quantitative easing] and valuations relatively cheap,” JP Morgan’s head of cross asset strategy John Normand said.
There is a difference this time around, according to Mr Normand.
“Now, the Fed is undoubtedly on an easing path but the global economy is slipping slowly into sub-trend growth due to an unresolved trade war and cross-asset valuations are fair to expensive.”
So what are the potential spoilers to ongoing gains?
“Another US-China truce that leads eventually to stalemate, higher tariffs and reciprocal tech bans, a poor corporate earnings season despite an interim trade truce, a Fed that eases much less than expected, and a US debt ceiling/budget cap debate that turns dramatic,” Mr Normand said.
They are all entirely plausible outcomes.
From a local perspective, iron ore is the big winner.
Depending on the index you choose, it is up more than 60 per cent since January.
Much of that is built on tragedy, but apart from the Brazilian supply disruption caused by another tailings dam collapse China keeps buying the stuff.
That has seen a rocket put under the likes of Rio Tinto (+29 per cent), BHP (+26 per cent) and the pure-play Fortescue Metals (+135 per cent). Add in the new bountiful dividends, and the total return is pretty handy.
Oil has also done well, but is delicately poised between swooning on a global slowdown and jumping further on mounting US-Iranian tensions through the Strait of Hormuz.
Australian equities have been one of the better-performing classes.
The ASX200 is up more than 17 per cent since January, putting it just behind the S&P500 in the US (+17.9 per cent), but well ahead of the global MSCI average (14.3 per cent).
The resource re-boom has helped, but inexplicably the banks – weighed down by an expensive royal commission-inspired clean-up on years of misconduct, a tumbling housing market and little, if any, revenue growth – have done well.
Of the big four, ANZ has done the best (+15 per cent). The perpetually troubled NAB has done the worst, but still made a tidy gain (+11 per cent).
However, the mud stuck to the financial services royal commission’s other special guests. IOOF has gone nowhere over the half and AMP has shed another 6 per cent.
Greece is the word
Globally, the biggest winners were perhaps Greek banks. That’s right, the very instruments that were set to immolate the financial system, Europe and the world economy not too many years ago.
The biggest Greek lender, Piraeus Bank, is up about 250 per cent this year, but a laggard compared with others like Attica Bank, which has put on almost 350 per cent.
Even Greek debt is in demand, with 10-year government bond yields down at an historic low.
The Greek stock exchange has gained 26 per cent so far this year, easily outpacing the rest of Europe in what has been the strongest start to the year for European stocks in two decades.
The appetite for risk doesn’t end there. High-yielding (that is non-investment grade) debt is being lapped up, and Bitcoin has surged 200 per cent.
Bitcoin and avocados
Interestingly, Bitcoin is keeping pace with the avocado bubble. It’s nuts and will probably go pear-shaped from here, but that’s investing 2019 style.
However, it is all relative. You could also argue Bitcoin is down almost 90 per cent from its peak.
AMP Capital’s Shane Oliver says while it can be fun to speculate on, Bitcoin can’t be taken seriously as a currency.
“Amongst other things, money should be a reliable store of value, and Bitcoin is hardly that.
“And it faces competition from numerous other cryptocurrencies. And as an investment it produces no income so has no yield and is impossible to value.”
Yes, but apart from that?
The one that you may be really grating your teeth on missing out on is corporate veganism in the form of Beyond Meat.
It was only listed in May, but it has returned investors like Bill Gates, Leonardo DiCaprio and former McDonald’s boss Don Thompson a handy 550 per cent profit, on paper at least.
On Reuters estimates, investors buying into the $US9 billion ($12.86 billion) company are currently paying the equivalent of $US143 ($204) for every quarter-pound (113-gram) portion of faux meat sold last year.
The fact that over the years, Beyond Meat has never made a profit shouldn’t be a problem (until it is).
To be frank, it has not been a great half for some of Australia’s commodity exporters.
While the iron ore miners have basked in the sunshine of good fortune, the past six months has not been the best for thermal coal, LNG, wheat and wool.
Australian thermal coal producers have been hit by a global retreat from intensive power generation.
They have also been hurt by China’s sudden rigorous environmental examination of coal shipped out of Newcastle.
Is it a ban on Australian imports? Not officially, it is just taking ages to clear customs in Chinese ports, unlike more sulphurous alternatives from Indonesia and Mongolia.
Thermal coal is also being displaced by another loser, LNG.
The slump in North Asian LNG spot prices has yet to severely hit Australian exporters out of Gladstone and Woodside in the West.
The vast majority of their sales are tied to long-term, non-spot contracts.
However, if the spot price stays low, you can bet the next round of contract negotiations won’t go well – unless you’re a buyer.
Wool’s slide is in part due to a correction after period of sustained gains; an extraordinary five years where the broad benchmark has roughly doubled in value.
Viewed through those rosy glasses, the 14 per cent pull back this season is not too bad.
Peter Morgan, from Australian Wool Industries Secretariat, says the industry and growers need some better global economic news than they are currently getting to make a new assault on the record $21.16 per kilogram stumped up in August.
The market hung on well until recent weeks, when global economic uncertainty rose in the wake of the escalating US-China trade war, the US-Iran tensions and the US-India trade disputes,” Dr Morgan said.
“Such disruption invariably impacts on commodity prices, particularly for discretionary products such as wool.
“If history is a guide, it is reasonable to expect that resolution of these disputes will be followed by an increase in wool prices.”
The winners on the ASX200 are a mixed bunch, but a big theme has been Australia’s small but expensive tech sector is getting more expensive.
- Nearmap: Geospatial map technology (+152pc)
- Fortescue Metals: Iron ore pure play (+135pc)
- Appen: Speech-recognition technology (+118pc)
- Magellan Financial: Global-focused funds manager (+117pc)
- Afterpay: Digital buy now, pay later service (+102pc)
The losers were equally eclectic.
- Eclipse: Fleet manager (-46pc)
- Costa Group; Horticultural producer (-45pc)
- Galaxy Resources: Lithium miner (-45pc)
- St Barbara: Gold miner (-44pc)
- Nufarm: Herbicide (Glyphosate) producer (-31pc)
Where to now?
There are several of options where things could go from here, but they can be distilled down to two – up or down.
A downer would be an escalation of the US-China trade war.
A third truce was declared following the tête-à-tête between presidents Trump and Xi in Japan over the weekend.
A big deal? Maybe, but the realpolitik is it was more a “no deal”.
The previous two truces were followed up with higher tariff walls, crumbling manufacturing and deeper despair.
The next couple weeks may well set the trend for the second half of 2019.
There will be no deep hole to rebound from this time.
At best, markets will simply grind higher on the expectation things are not getting worse.
Of course, things could get worse and then the second half of 2019 could look like the second half of 2018, which was plain ugly.