2018 was a year in which the LD Discretionary investment fund recorded a negative return for the first time since the 2008 financial crisis. Several of the other investment funds available to members of Dyrtidsfonden also ended the year with a negative return, due to a difficult year for equity investors in general.
The vast majority of asset classes recorded negative returns in 2018. Measured in Danish kroner, global equity markets fell by -4.6 per cent in 2018. However, there were significant fluctuations throughout the year, with global equities peaking at 8.1 per cent in early October, before falling and ending the year with a negative return. For Danish equities, the performance was even worse, with the leading OMXC25 index ending the year with a return of -11.2 per cent. Only Danish mortgage bonds and a few segments within the credit market delivered positive returns in 2018.
LD Pensions had already decided at the end of 2017 to reduce the risk in its investment portfolio, and the equity allocation in LD Discretionary was therefore reduced at the turn of the year. This helped to ensure that the return in 2018 was less negative.
Is an economic recovery or a recession on the horizon?
The global economy is currently teetering between continuing its recovery and heading towards a recession. Recoveries often go hand in hand with good returns on shares, whilst recessions often lead to significant falls. It is the uncertainty surrounding future developments that is affecting the markets.
Since the financial crisis exactly 10 years ago, the global economy has undergone a slow but steady recovery. Low interest rates over the past 10 years have helped to put economies back on a sound footing, and the world is now in a better and more robust position. However, the economy moves in cycles, so no matter how much central banks and politicians would like to avoid recessions, they are inevitable.
During 2018, market sentiment shifted from optimism about the recovery to the prospect of a possible recession in 2020. Fears of a recession stem from several factors. Unemployment is low and wages are rising. At the same time, the US Federal Reserve continues to raise interest rates, which could put pressure on corporate earnings. Europe has never fully recovered from the financial crisis, and China is experiencing a slight slowdown in growth. A trade war is brewing between the US and China, alongside Brexit and the Italian government’s dispute with the EU over the budget deficit – all of which could have negative consequences for share prices. Consequently, investors have shifted from being very positive to a more neutral stance. Specifically for Denmark and Danish shares, the price falls were the result of a combination of disappointments over financial results – based on historically high expectations for corporate earnings – and specific negative corporate developments, such as those at Danske Bank.
However, it is far from certain that we will face a recession in 2020, and the run-up to the next recession could bring significant gains for shareholders. Nor is it certain that the next recession will be severe or result in significant negative returns. At present, corporate earnings are very strong, particularly in the US. The Chinese government is attempting to boost economic growth through capital injections, and there are positive signs regarding US-China relations and Brexit.
Outlook for 2019
LD expects global growth to develop positively in 2019, with an expected growth rate of around 3.5 per cent. However, the trade war between the US and China has begun to have a noticeable impact. Economic activity has thus fallen significantly in both China and the eurozone. There is therefore considerable uncertainty built into the forecast for global growth. Brexit also remains a source of uncertainty that could potentially have consequences for the entire European economy and, consequently, for developments on the stock markets.
Despite the negative return in 2018, members’ savings in Dyrtidsfonden have increased by 7.7 per cent over three calendar years, which, when compared with the trend in consumer prices, represents a 5.5 per cent increase in purchasing power.
