By Jason Wong, Head of Investment Strategy for AMP Capital Investors (New Zealand)
Key points
- The year 2009 got off to a very poor start with sharemarkets plunging further. However, a significant change in risk appetite through the year resulted in a massive turnaround in performance for shares. In terms of asset returns, last year's winners were this year's losers, while last year's losers were this year's winners. And, overall, risky assets were the place to be in 2009.
- The unprecedented policy response to the global financial crisis helped save the world and global economies were back on a recovery path by the middle of the year.
- Attention now turns to the shape of the recovery and the timing of the reversal of the policy response. Both are crucial in assessing the outlook for markets.
- We think that policy makers will err on the side of caution in removing the policy stimulus currently in place, which will help support a further run in risky assets. However, the easy gains have been made in shares and 2010 could end up being a fairly rocky year.
Fortune favoured the brave in 2009
The year 2009 began as 2008 ended with growth assets plunging even further. However, those investors brave enough to hang in there or rebalance into those assets were well rewarded.
A rocky start
As the year began, the evidence continued to mount that world economic growth was cratering. A massive hole was created in the December 2008 quarter, as markets froze after the collapse of Lehman Brothers in September, and subsequent data showed that the global economy fell further in the March quarter. It was clear that many economies were facing their weakest performance since World War II. Policy makers were frantically trying to unclog the financial pipes and get businesses moving again. The central banks of the major economies focused on slashing policy rates close to zero, buttressed by liquidity measures and balance sheet expansion; and buying government bonds, corporate bonds and other securities.
Governments were focused on stimulating economies by direct fiscal expansion, disregarding significantly widening budget deficit positions. Financial plans to save banks, insurance companies and auto makers were all part of the package and direct assistance was given to home buyers.
All in all, the policy stimulus measures were unprecedented in nature, with officials determined not to repeat the mistakes of the Great Depression, and offering all they could to help support economies and financial systems.
Over January and February, at the height of the economic despair, investors were not willing to back the policy makers. Fearing the worst, risk assets continued to plunge right through until early March.
Then the tide turned
By March, economic indicators stopped plunging and some actually began to rise. Equity market price-earnings (P/E) ratios had reached single digits and policy makers were still 'going for it'. Investors began to sniff an opportunity.
The worst performing asset class by far was New Zealand direct property (we use AMP's property fund, because no timely index exists), as it played catch-up in terms of the devaluations seen in the listed space last year.
The clear pattern was that assets that performed very well last year, performed relatively poorly this year, while last year's losers, were this year's winners. This reflected the significant turnaround in risk appetite.
The economic outlook for 2010
A decent recovery in 2010 from a low base With the year almost finished, real world GDP growth will post its first negative result (about minus 1%) since World War II. From that low base, we have seen a strong bounce in leading indicators, which bodes well for a decent recovery in 2010. Indeed, world growth next year should be even stronger than the 3% recorded in 2008 and is expected to be close to world 'potential' growth of circa 4%.
Driving the recovery is the significant policy stimulus - both monetary and fiscal - that is still working its way through the system. Financial market conditions are currently very easy and this should support growth in economic activity. An added kicker is an inventory rebuilding phase that needs to occur, with current inventory levels pretty lean at the moment.
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