Pete Wargent blogspot


'Must-read, must-follow, one of the best analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Markets & Economics Editor, Sydney Morning Herald.

'I've been investing 40 years & still learn new concepts from Pete; one of the best commentators...and not just a theorist!' - Michael Yardney, Amazon #1 bestseller.

Sunday, 22 December 2019

2019 in review...and what's in store for 2020?

2019 in review

2019 has been an interesting year, to say the least.

In real estate, it was the quintessential year of two halves, with desperately low transaction volumes before the May election, and then inner-Sydney property recapturing record highs in the second half of the year. 

Other parts of the country experienced mixed fortunes, but were a bit more buoyant in the second half.

As for stocks, well, that's all gone very well...but, to be fair, almost any long-only strategy would have ripped in 2019. Bazinga!

It's a big world out there

A review of my 2019 - not advice...

The best performing investment from the 'dogs of the world' part of our strategy (which may include investing in the most out-of-favour stock markets, asset classes, sectors, or styles) this year was obviously Greece, with 1-year returns likely to finish the year at about 50 per cent. 

The financial media occasionally attempts to grapple with long-winded explanations for this massive outperformance, but they're mostly flaky or unconvincing (the Greek economy is not exactly firing, after all, with an unemployment rate at close to 17 per cent!).

The main reason for the huge rebound in fortunes was simply a change of sentiment after the stock market was crippled in 2018, when it experienced a crash of -37 per cent.

Everyone out together, everyone back in together...same as it ever was. 

Don't over-complicate it: there's more than one stock market in the world, so buy when low, and sell when high (Greece is clearly now a sell). 

Pakistan has also delivered accumulated returns of well over 40 per cent since August, and we weren't too far off ticking the bottom with that one (we bought when the market's dividend yield was close to 10 per cent, and this one we'll be holding into 2020). 

On the other hand, after an initial 30 per cent bounce, Turkey's ETF, which was one of our H2 2018 investmentshas delivered only modest returns over this calendar year.

That's the way it goes - stock market returns don't conform to calendar years, and the index is still plenty cheap enough to hold for now (in any case, part of the point of buying low at this stage in the cycle is to look for asymmetric bets and to avoid drawdowns - rule #1, don't lose money). 

Now this all sounds great, and it's certainly nice to see some big positive returns.

But as I say, almost anyone with a pulse and a sensible long-only portfolio could’ve gone great guns in 2019.

The acid test for any investment strategy is how it fares through the cycle.

Looking ahead to 2020 (not advice...)

The Aussie stock market has had a blistering run in 2019, and looks set to deliver total returns in excess of +25 per cent.

Thanks to the increasingly outsized role of passive indexing and superannuation, this sees total Aussie household wealth per capita blazing to the highest level on record, which is a remarkable stat given what doomsdayers were confidently predicting as recently as May. 

Some of the stock valuations now look ludicrous to me, so I've been dialling back exposure for quite a while (‘too early’, in fact - though I don't believe I'm missing out on any real returns by taking risk off at these levels).

Resources and some financials are priced quite conservatively, especially given record low bond yields.

But as for high PE and growth stocks, this looks increasingly like a...well, you-know-what.

Source: GS, via Livewire Markets

And it's the same for high quality stock market multiples - these are now higher than they were at the time of the tech bubble.

Source: Goldmans, via Livewire Markets

In short, resources and financials may be priced reasonably in Australia, but some industrials and other sectors are approaching bubble-like valuations.

Passive smokin’

It's interesting to reflect on the global role of indexing and institutions with their index-like portfolios, and how even the dross that comes into an index immediately catches a bid, to the benefit of stock promoters and to the detriment of future index fund returns. 

Generally speaking I’m a big fan of index funds, but it's a curiously troubling phenomenon to see global businesses one might at best judge to be ultimately worth zero (and at worst borderline frauds) spike in price simply because they've entered a benchmark index, leading forced buyers hoover up stock.

This isn't necessarily a major issue, especially for the relatively narrow Aussie index, merely a disapproving observation. Perhaps it's an inevitable side-effect of ‘light touch’ regulation, but we must take the world as it is, not as we'd like it to be.

Year-end rebalance

I'll look to rebalance my portfolio on 1 January, so let's see what the rest of 2019 brings.

There likely seems to be more value in Europe than in the US or Australia next year.

After a bonanza in 2017, the Poland ETF has had a couple of down years, and its CAPE ratio is edging back closer towards reasonable value, so that might yet be worth a look, but let's see where things are at in the new year. 

None of the asset classes look cheap after this year's strong performance, but some sectors (e.g. oil) have recently piqued interest.

We explain how a regular portfolio rebalancing exercise forces you to buy low and sell high in our new book, which is due out in February 2020.


Note: This is what I've been up to in 2019 - just in case you have a time machine, this is obviously not advice, etc.