It’s fair to say that 2016 has been an historic year. According to British bookmaker Ladbrokes, if, at the beginning of the year someone had made a £1 accumulator bet on the Brexit vote, Donald Trump winning the election and Leicester winning the Premier League when they were at their longest odds, they would now be sitting on £4.5 million.
What, if anything, did we learn from the financial events of 2016 and how can we apply this to 2017? Here we take a look.
Whilst Article 50 has yet to be invoked, the nation’s split decision to leave the EU came with much surprise and in turn, a market backlash. With this decision, the events that followed included the resignation of David Cameron as prime minister, the appointment of Theresa May and a cabinet reshuffle.
The initial aftermath saw sterling plummet to 30-year lows and the currency struggled to recover in the months that followed. In June, the volatility of the pound against the euro peaked, and there were potential movements in the price in either direction of 43%.
In the months following the EU referendum a large number of investors in the UK made very few changes to their savings and investments despite the rising volatility in the markets. According to a survey commissioned by Moneyfarm, 89% of Brits made no changes to their investments following Brexit. The survey also found that more than three quarters of Brits with investments did not seek any form of financial advice post-Brexit, a decision that did not pay off for performance.
A UK investor with global exposure will have benefitted from the weakening pound, and a strengthening in the FTSE. As the debate surrounding the UK’s future relationship with the EU unfolds, investors will need to be prudent as levels of volatility will change, coupled with this, inflation expectations are impacting the performance of gilts. It’s crucial that investors avoid a home country bias.
Donald Trump’s Republican victory as president was largely unexpected, with polls predicting that it would be Democrat Hillary Clinton that would steal the show. Many believe it was a vote for change in America – fighting back against the perceived liberal elite.
As a candidate, the reforms Trump had put forward caused much worry and uncertainty within both the senate and the financial markets. However, in the past couple of weeks there have been a number of announcements that have been received more warmly; many of his cabinet appointments appear to be from the political mainstream. US growth predictions for 2017 have been revised up since Trump’s election, and the S&P 500 (US equity index) is up 8.9%, its highest level since launch.
The changing price of oil
Oil reached an historical low in February as it hit $27 a barrel due to oversupply and a sluggish global demand. There was a disconnect between the strategies of the Organization of Petroleum Exporting Countries (OPEC) and US producers. The former wanted to reduce supply, whilst the latter wanted to increase production. But as rumours surfaced of floating storage something had to be done.
The price returned to above $50 a barrel as global growth returned to the table and OPEC moved to cut production. The change in oil price has been one of the main drivers of equity performance this year and there has been a huge correlation between the rise in oil price and the rise in equity. This is most evident in the emerging markets because they are often large exporters of oil.
This rise in oil prices has undoubtedly contributed to UK inflation this year, but ultimately the higher price is a signal of a stronger global economy.
The Italian referendum
The Italian referendum didn’t shake the world as some investors expected. Italy may have voted no, but the EU is seemingly still intact, and investors seem to have come away relatively unscathed.
The constitutional referendum turned into a vote of confidence for Italy’s prime minister, Matteo Renzi, who ultimately resigned as a result of the referendum. As we go into 2017, it is with a degree of political uncertainty as a transition government has been formed. The outlook for European banks and Italian bonds is still unclear, and both suffered as a result of the vote.
China’s growth prospects
Growth, or a lack of, has been a theme running through the financial markets of 2016. It started in January with concerns around China. Chinese equity was one of the worst performers in January and by the end of the month trading had been halted twice. Pundits started to talk of a deceleration in Chinese growth, which had been touted as one of the fastest growing emerging markets. As volatility increased around the world, a ‘made in China’ crisis was the last thing anybody wanted to see.
Volatility indices reached multi-year highs, and markets priced in moves in the US equity market of 41% up or down. One might have forgiven an investor for feeling a little nervous. But, as February drew to a close the prospects of deceleration in China looked less likely and markets began to stabilise. And now, China’s growth figures for the year seem to be around 6.5% which is similar to 2015.
Either because of, or in spite of, all of the change over 2016, the latest IMF forecast reveals that global growth is actually picking up after a number of weak years. Despite the global GDP growth rate of 3.5% being lower than the 4.5% average that preceded the decade before the recession, it is still better than the average over the past five years.
As we look back on a year of surprises, and a much changed political landscape, a lot of questions will be raised. The one certainty as we go into 2017 is that markets will move as policies are announced, Article 50 triggered, and leadership made clear.
The market movements of 2016 served to emphasise the need to take a longer-term view. What seemed important in January, has been all but forgotten by December. And any losses in the equity market have been made back due to the rise in the oil price.
In times of volatility it can be tempting for investors to flock to cash savings. But interest rates in the UK were cut to historic lows mid-way through the year. Many banks followed suit, halving the interest rates they offer on their savings account. It has been a difficult year for savers, and even the government has pointed out the need to hunt for alternatives by introducing a savings bond during the Autumn Statement.
An investment strategy focussed on diversification has proved to be a strong tool to have in 2016, and will continue to be crucial in 2017. Investors with global exposure have seen some positive performance in spite of the difficult circumstances. Ensuring your investment portfolio has alternative drivers of growth, and seeking the advice of professionals could prove to be helpful as we go into the new year.