As the year draws to a close, it’s time to take a look at the key themes that caught our attention in 2017 and see how they impacted our portfolio performance.
In the UK, the year was characterised by Brexit negotiations, the snap general election and political tremors from near and far.
Offering respite to the tense geopolitical stage, London hosted the World Championships in Athletics, Prince Harry got engaged to Meghan Markle as the nation was gripped by Blue Planet II, and the UK got its first female Dr Who.
Sometimes, it can be difficult to keep up with global events. That’s why our experts constantly monitor the markets for you to ensure your portfolios are positioned to help you achieve your long-term financial goals.
Here are some of the main themes we’ve been looking at over the last 12 months, so you can hold your own at any dinner parties over the festive period.
Brexit and UK politics in 2017
Theresa May triggered Article 50 in March, starting the two-year countdown for when the UK will leave the European bloc. Since then, negotiations have been tough.
The Prime Minister hasn’t made it any easier for herself. May called a snap general election in June to strengthen her hand at the negotiating table. In fact, she lost the Conservative majority and had to rely on the Democratic Unionist Party to secure a minority government.
Tense Brexit negotiations reached an important milestone in December, with both sides of the divorce agreeing on the divorce bill, EU citizens rights and the Northern Irish border issue.
Talks in 2018 can finally turn to trade, something the UK has wanted for some time to try and ease economy nerves and plug a trend for business contingency plans. It takes time for trade deals to be agreed, however, so the hard work is only just beginning.
UK economy and interest rates
The UK economy has been a mixed bag in 2017; growth has fared much better than Brexit doomsayers had predicted and unemployment is at record lows.
On the other hand, GDP has been trailing behind other developed nations, inflation has been gaining momentum, wages are stagnant and productivity is in the doldrums.
In November, the Bank of England bowed to pressure and hiked interest rated by 25 basis points to 0.5%, in an attempt to ease the momentum behind inflation. This rise will make borrowing more expensive, but should eventually feed into the returns on savings accounts.
Inflation picked up momentum in 2017, fuelled by sterling’s devaluation following the Brexit vote feeding into the price of goods at the till. The rate of price growth consistently outperformed the government’s 2% target throughout the year.
Wage growth has failed to keep up with inflation, and household budgets are feeling the squeeze. The Bank of England has said any further tightening of monetary policy will be slow and gradual. It needs to be careful – an aggressive return to normal monetary policy could rattle the financial markets.
Inflation
Inflation was the story that didn’t happen in 2017 – with the exception of the UK. As global growth gained momentum, employment levels steadily rose, and talk of skills shortages increased – you might have expected to see wage growth and inflation to accelerate in 2017.
So far, inflation levels have remained relatively subdued, which has given Central Banks the freedom to take a gradual approach to normalising monetary policy.
Central Banks
Unwinding some of the monetary stimulus employed since the financial crisis is an obstacle facing global Central Banks. Low interest rates and quantitative easing programmes have supported global financial markets and contributed to record levels of volatility, but they need to be scaled back.
America’s Federal Reserve has led the way, with a number of interest rate rises under its belt already – three/four are expected next year. Current Chair Janet Yellen has decided to start scaling back America’s extensive QE programme, too.
Yellen’s term comes to an end in 2018, and Jay Powell has been nominated to take the helm after her. He’s widely seen as a continuity candidate.
The European Central Bank has maintained its monetary stimulus, but positive economic growth certainly sets the scene for unwinding to begin when the Central Bank is ready.
The Bank of Japan, however, has committed to an extremely dovish monetary policy. The weak yen and global recovery has paved the way to a period of solid economic growth, with third-quarter annualised growth of 2.5% well-above the long-term average.
Volatility
2017 will be known as the year that investors ignored evolving events. Despite the markets being cloaked in such uncertainty, markets have failed to react to political and economic tremors in the way they used to.
Adding fuel to what’s arguably one of the longest bull runs in history, financial markets have made numerous record highs in the face of Brexit tensions, various domestic challenges both here, in Europe and the US, and geopolitical fighting. Luckily, earnings seem to be supporting lofty valuations so far.
For example, despite Trump’s very public spat with North Korea’s Kim Jong Un, the nonchalant financial markets just aren’t budging as the stand-off gets noisier.
Warning signs are flashing for many, however, as investors try to predict whether or when the game of financial buckeroo will end.
America
Fast approaching his first anniversary as President of the United States, Donald Trump will likely do his own reflecting in the new year. For him, his key take-away will probably be that being a president is harder than he thought.
Trump has scored his first legislative victory with his reforms of the US tax system and will now have some ammunition to call his first year a success.
Still, it’s worth looking at the progress of his other campaign issues. He’s failed to repeal Obamacare, he’s barely an inch closer to building a wall on the US-Mexico border, and his talks on trade with China have fallen rather flat.
The US financial markets have had a strong year, with a number of record highs in the bag.
Europe
Europe became the surprise economic story in 2017, with its renewed economic optimism. Macron’s election win in France symbolised this shift, along with some of his early successes.
Economic growth expectations have been steadily upgraded throughout the year, rising from 1.5% to around 2.2%. This acceleration in growth has feed through into the European equity markets and the euro.
History tells us to be cautious, with the eurozone’s recovery from the 2008 global financial crisis slipping into a deeper crisis of its own in 2011. Still, many reckon the European Central Bank will start unwinding its €60 billion quantitative easing programme in 2018.
Bitcoin
There’s no doubt that 2017 was bitcoin’s year. After thrashing through its $10,000 milestone in November, its march higher continued to $17,000 and then an inch within $20,000 on Sunday 17 December. It quickly slipped $1,300 in just a few hours. Over the last year, bitcoin is up over 2,250%.
One of the most significant innovations of the last decade, bitcoin has had a revolutionary impact on the traditional financial industry. It’s essentially a virtual coin that you can buy items with, but only access online.
Bitcoin is unregulated and incredibly volatile – investors can expect the value of their money to swing wildly in minutes.
Whilst cryptocurrencies like bitcoin have similar dynamics to other investments – when demand is high so is the price, and when demand falls so does the price. However, there are no other ways to value bitcoin at present.
Bitcoin displays many characteristics of a bubble and investors should add it to their portfolio wisely if they choose to do so. Remember, you should only invest in things you understand otherwise how do you know when you have reached your goal?
How have Moneyfarm portfolios performed?
Despite sterling’s appreciation against the dollar and tightening monetary policy, the Moneyfarm model portfolios delivered a positive performance in 2017 of between 1-10%. The reason? Our equity exposure.
The bull market continued to run in all the major equity indices during 2017, underpinning the final positive numbers.
Our overweight exposure to Emerging Markets also paid off, with emerging countries outperforming their developed counterparts by around three times. Riskier assets like Emerging markets Sovereign Bonds also helped, even if the appreciation of the pound over the dollar caused some growing pains.
Unfortunately, high yield couldn’t live up to its 2016 performance, and this weighed on the highest risk portfolios due to their larger exposure to the US. Sovereign bonds, nominal and inflation-linked bonds didn’t contribute meaningfully to performance in 2017.
We hope you’re as excited for 2018 as we are.
