This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Central Banks Fuel Strength in Bonds and Equities

  • Extraordinary returns from financial assets as central banks around the world ease monetary policy
  • All this despite a negative political background (Trump’s tariffs, Brexit unresolved, civil unrest from Hong Kong to Chile to France), sluggish economies and weak corporate earnings
  • 30% of global government debt now has a negative yield
  • ESG considerations come to the fore

At the start of 2019, investors were nervous and confidence was fragile. But a few days later came the dramatic pivot by the US Federal Reserve. Their bias towards hiking interest rates was dropped and the market began to price in cuts. Ultimately, they delivered a total of 0.75% in interest rate reductions in three stages. With the European Central Bank also easing policy, the stage was set for central banks around the world to follow suit.

Chart 1: Asset performance year-to-date 2019

Greece outshines in bonds and manufacturing

With global economic growth sluggish and inflation low, bond yields tumbled. At the peak in August, 40% of developed market government debt had a negative yield. The bond market generated a long list of other remarkable statistics in 2019. We gasped when Italian 10-year yields fell below 1% in August and held our breath as they hit 0.5% a month later. Almost the entire Italian yield curve now lies below its US equivalent. But the prize for the best performer in the EU goes to Greece, a market that few investors would touch a few years ago as they restructured their debt and 10-year yields reached 35%. Today, Greek government bonds now yield just 1.5% at 10-year maturities, a decline of 2.8 percentage points year-to-date with a yield curve which also lies below that of US Treasuries. To top it all, Greece enjoys one of strongest manufacturing purchasing managers’ index (PMI) whereas that for Germany is in recession territory.

Bond markets may have enjoyed a strong rally in 2019 but investors required nerves of steel or good fortune to make the most of the performance. The year-to-date return on 30-year German bunds hit 33% in August but they have since given back almost half of that and are now up ‘only’ 18%. Investors in the Austrian 100-year bond had an even more volatile ride: up 80% year-to-date in August and 46% now. By contrast, the UK gilt market was a sideshow.

Growth stocks outperform

Tumbling interest rates provided the background for the strong performance in equity markets, led by the NASDAQ. This provides further evidence for the role of interest rates, as the index is weighted towards ‘growth’ or ‘long duration’ stocks that benefit most from lower interest rates. It certainly wasn’t earnings’ strength that pushed markets higher: most major markets look set for flat or negative growth in earnings in 2019. Indeed, one of the most powerful themes in equity markets in recent years – the outperformance of ‘growth’ versus ‘value’ – was propelled further by declining interest rates and, on some measures, now looks fundamentally overvalued.

Emerging markets have struggled

Emerging market (EM) equities produced decent returns in absolute terms but underperformed developed markets (DM) consistently over the year. It remains to be seen whether the significant interest rates cuts in EM generate a revival in 2020. China undoubtedly suffered from the tariffs imposed by President Trump, which went far further than expected by most market participants, including ourselves. But other EM markets delivered similar lack luster performance. The FTSE-100 was one of the few DM indices that matched EM’s underperformance. It is traditionally a defensive market but also suffered from being the biggest underweight in global portfolios according to most surveys due to Brexit uncertainty.

Chart 2: Earnings vs. Economic Policy Uncertainty

Political uncertainty and civil unrest are short-term headwinds

The broad-based rally in financial assets occurred despite an adverse political background. We have already mentioned Mr. Trump’s tariffs. His anti-business stance in 2019 contrasts with the market-friendly tax cuts and de-regulation that characterized the first half of his Presidency. Brexit uncertainty continues as the UK faces a general election under its third Prime Minister since the referendum in 2016. Civil unrest in Hong Kong has been front page news but it has also been evident in France, Chile, Lebanon and several other countries. Domestic markets undoubtedly suffer when uncertainty damages the macro economy, as in Hong Kong. Chart 2 above suggests that market valuation is also sensitive on a short-term basis to political uncertainty. But for this year at least, the interest rate stimulus has dominated.

ESG considerations come to the fore

Another market theme that rose to prominence in 2019: ESG (environmental, social and governance) investing. This has long been a focus of BMO Global Asset Management, but it is now front and center across our industry. As ESG-driven flows increase, their influence on individual equity performance will follow suit. Issues such as climate change may play out over decades, but markets are a discounting mechanism, which suggests that this and related ESG considerations are set to become powerful factors in shorter-term market movements.

Originally Posted on December 17, 2019 – Central Banks Fuel Strength in Bonds and Equities

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Investments cannot be made in an index. Investing in emerging markets can be riskier than investing in well-established foreign markets. Past performance is not a guarantee of future results.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Disclosure: BMO Global Asset Management

This website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Information on this website does not constitute an offer for products or services, or a solicitation of an offer in any jurisdiction in which such solicitation or offer would be unlawful. Products and services can only be offered by appropriate representatives of the respective manager. Notice to residents of the United Kingdom: For the avoidance of any doubt, the information on this website does not constitute an offer for products or services to persons in the United Kingdom.

BMO Asset Management Corp. is the investment adviser to the BMO Funds. BMO Funds are distributed by Foreside Financial Services, LLC. Member FINRA/SIPC. FINRA’s BrokerCheck.

All investments involve risk, including the loss of principal.

Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties.

Investors should carefully consider the investment objectives, risks, charges and expenses of the BMO Funds. This and other important information is contained in the prospectuses and/or summary prospectuses, which can be obtained by calling 1-800-236-3863. Please read carefully before investing.

BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management and trust and custody services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO Asset Management U.S. consists of BMO Asset Management Corp., BMO Asset Management (Canada)® includes BMO Asset Management Inc.

BMO Taft-Hartley Services and BMO Trust and Custody Services are a part of BMO Global Asset Management and a division of BMO Harris Bank N.A., offering products and services through various affiliated entities of BMO Financial Group.

Investment advisory services in the United States are provided by BMO Asset Management Corp., BMO Asset Management Limited, LGM Investments Limited, BMO Global Asset Management (Asia) Limited, Pyrford International Ltd and Taplin, Canida & Habacht, LLC.

Investment advisory services in Canada are provided by BMO Asset Management Inc., BMO Asset Management Corp., LGM Investments Limited, BMO Global Asset Management (Asia) Limited and Pyrford International Ltd.

Financial promotions in the United Kingdom are provided by LGM Investments Limited, Pyrford International Ltd, and BMO Asset Management Limited. LGM Investments Limited, Pyrford International Ltd, and BMO Asset Management Limited are authorized and regulated by the Financial Conduct Authority in the United Kingdom.

Asset management services in Hong Kong are provided by BMO Global Asset Management (Asia) Limited, licensed by the Securities and Futures Commission to conduct regulated activity Type 9 – asset management under the Securities and Futures Ordinance.

Please read the Privacy Policy and Legal Disclosures reached through links above for important information.

Investment products are: Not a Deposit — Not FDIC Insured — No Bank Guarantee — May Lose Value.

Copyright © 2020. BMO Financial Corp. All Rights Reserved.

TM/® Trade-marks/registered trade-marks of Bank of Montreal, used under license.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from BMO Global Asset Management and is being posted with permission from BMO Global Asset Management. The views expressed in this material are solely those of the author and/or BMO Global Asset Management and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

trading top