2016 was a year dominated by political upsets and upheavals but, despite the shocks experienced – fears of Chinese debt implosion, Brexit, Trump, various terrorist attacks, Leicester City winning the Premier League – it was an extremely strong year for markets overall. In fact, one of those years that beautifully illustrates the value of ‘time in the markets’, as opposed to ‘timing the markets’.
In the UK, Brexit uncertainty continued to rumble on, however the FTSE 100 ended 2016 at a new all-time high of 7,142.83 as mining and energy stocks rallied strongly. Even the more domestically focused FTSE 250 ended the year close to all-time highs. Inflation figures for November were released showing inflation climbed to 1.2%, its highest level for two years.
In the US, the Federal Reserve raised interest rates by a quarter percent as expected to the 0.5%-0.75% range. In addition, it indicated it was likely to raise rates more rapidly than previously expected as incoming President Trump’s policies are likely to stoke inflation.
In Europe, Prime Minister Matteo Renzi’s referendum on constitutional reform was defeated, although fears over the effect on Italy’s fragile banking system did not fully materialise. Renzi subsequently resigned and struggling bank Monte dei Paschi’s bid to raise further capital privately did, however, subsequently fail, forcing it to make a formal request for a state bailout.
In Japan, the Bank of Japan’s (BoJ) policy of capping 10 year rates at zero so far appears to have been very successful in weakening the yen and in supporting exports and domestic demand, causing the BoJ to be more sanguine about the county’s economic outlook.
European equities bounced strongly over the month, driven by oil companies and banks, to be the strongest performing asset class, followed closely by commodities. UK equities, with their strong commodity focus, were also particularly strong although it was the large-cap FTSE 100, up 5.37% rather than the mid-cap FTSE 250, up 3.3%, that performed best.
Although all asset classes generated positive returns for sterling investors, hedged to sterling global government bonds were the weakest performers of the bunch, up just 0.1%.
Given underlying asset class strength, December was a strong month performance wise for all portfolios.
Absolute Oriented Portfolios very slightly outperformed Core Active as a result of strong absolute return fund performance over the month.
Relative performance was in-line over the month with the 10 balanced funds we track regularly up 2.4% over the month with the highest performing up 3.4% and the worst up only 1%.
Overall, Core Active 6 outperformed 4 of these 10 competitors.
Looking back at 2016 and forwards to 2017
The below chart from J.P.Morgan Asset Management illustrates beautifully that despite their volatility, equities markets have tended to generate returns for patient investors who hold them over the long term.
It measures the price returns on the FTSE All Share over calendar years and contrasts them against the maximum drawdown within each calendar year. For example, in 2016 the price return excluding dividends was 12%, whilst the maximum price fall was also 12%.
And the above looks only at the FTSE All-Share in price terms excluding dividends, 2016 sterling returns to higher risk PortfolioMetrix investors were even stronger due to: investing globally, a weakening of the pound and the receipt of dividends.
2017 also promises to be an interesting year, with the following big political events on the horizon likely to increase market volatility:
- Trump’s inauguration on 20 January
- Dutch elections on March 15 where there is the potential for the Netherlands voting in Geert Wilders and his hard-right Freedom Party which favours leaving the EU and a ban on the Quran
- 31 March – May’s deadline for invoking Article 50 and the start of exit negotiations with the EU
- French presidential elections in April-May where far-right candidate Marine Le Pen of the National Front (which favours exiting the EU) has a good chance of reaching the second round and has a slim chance at victory
- May – Iran’s presidential race where hardliners seek to challenge reformist Hassan Rouhani which, along with Trump’s hostility, could potentially scupper the existing Iranian nuclear deal
- Autumn – China’s Communist party congress where leader Xi Jinping, already the most powerful Chinese leader since Mao Zedong, is likely to try to further extend his influence
- September-October: Germany’s election where Angela Merkel, a bastion of stability in Europe, faces challenges in seeking her fourth term and where the anti-euro, anti-immigrant Alternative for Germany will be trying to enter parliament
- Throughout the year – constant speculation on when the next Fed rate rise will be and how many of them there will be this year.
Looking at the above list, it’s easy to be apprehensive. But the lesson of 2016 for investors is that it’s possible to make very good returns even in volatile years. And looking back even further, including studies such as those in the chart above where positive returns where achieve in 22 out of 31 years (71% of the time), the lesson is even clearer: every year, whilst the possibility of a market selloff exists, the odds are very much in investors’ favour.
With the New Year underway, review your investment or pension and see how PortfolioMetrix can minimise your charges, and maximise your growth.
Speak to Intelligent Investments today.