There are alternatives to equities

2019 was a good year for investments, but not just for equities. The outlook also strongly suggests that a broad-based portfolio is advisable.

2019 was an outstanding year for equities. Returns from the major lead indices stood at between 16 percent (UK) and over 30 percent (Switzerland). This rally was no foregone conclusion: at the end of the year the economic leading indicators pointed to significantly lower figures than at the start of 2019. For example, the ISM Manufacturing Index, the most important leading indicator for the US economy, continued to signal declining industrial activity, at 47.2 points in December 2019. A year earlier it had stood at a high 58.8 points. Various political wrangling – including the discussions over Brexit and the trade dispute between the US and China – had a short-term impact, but no meaningful effect on equity price performance overall.

Equity prices have fallen in every recession regardless of interest rates.

Equities are not the only attractive asset class

It is easy to conclude that this is because there is now “no alternative to equities” for investors at the moment and, as a result, rising equity prices are almost inevitable. But is that really the case? Equities are clearly an important component of a balanced portfolio over the long term. However, there are two points to consider.

First of all, certain factors driving equities also apply to other asset classes, as 2019 clearly illustrated. The value of various investments increases when interest rates fall. In particular, emerging market bonds benefited from this last year. A combination of a depreciating dollar and solid economic performance meant they also posted double-digit returns. But lower interest rates also saw the valuations of real estate funds in Switzerland climb, despite their prices having already reached high levels in historical terms at the start of the year. They gained by almost 21 percent in value year-on-year. However, it is not just the increase in value of the two asset classes mentioned that is notable. The coupons of emerging market bonds and the distribution yields of real estate funds, too, are at least on a par with the profit distributions of private limited companies.

When not investing is a better option

It’s also important to remember periods of considerable market turmoil. In such times, it is vital to be aware of the alternatives to equities. Equity prices have fallen in every recession regardless of interest rates. Corporate earnings forecasts become too uncertain and the advantages of lower interest rates are of secondary importance. For a short period it can even pay off to hold onto cash instead of investing in equities. Investments deemed particularly stable in times of crisis, such as gold, are obviously also attractive. We haven’t reached that point yet though. For the time being, we anticipate steady growth rates for 2020. However, there are enough risks to warrant an degree of caution. This is why a broad-based portfolio remains advisable.

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