2016 has been an interesting year; in January few would have expected the UK to vote for Brexit, and even fewer would have thought Donald Trump would be a true contender in the US presidential race. This year has taught us that the consensus is often wrong.
A scary investment environment
The first quarter of the year gave many investors nightmares. The oil price was down 25% by 20 January and the emerging markets (MSCI EM index) didn’t look like a strong investment as it was down 13% by 21 January. Fast forward 10 months and emerging markets have enjoyed strong growth and are now up 31% from their lows, and oil is now $47.43 a barrel, stronger than it was at the end of 2015 and much closer to the $50 a barrel benchmark.
A lot of uncertainty and volatility has also come from the geo-political space. The UK’s vote to leave the EU caused currency to swing wildly, on the day of the result the pound hit lows not seen since 1985. Prior to the referendum the FTSE 100 enjoyed 7.1% growth from 14-23 June, on the 24 June it was down 3.1%, and then in October the FTSE 100 was close to record highs. In the coming months we have the US election and the Italian referendum which could also impact market volatility.
The hidden ghosts
The bond investment environment looks rather grim today. Yields around the world are close to record lows, global growth remains weak, and the actions of the central banks are dampening volatility. With yields so low there is likely to be more risk than reward for investors. The bond space remains a difficult investment environment and it is important that investors maintain a focus on diversification.
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The European banks are also one to watch. The Eurostoxx Banks Index dropped by 15% in January, yet many are now relaxed about the banks position as they are seemingly stronger. However, the banks are still down by another 6% since January and still represent a concern for financial markets and tax payers.
Should we really be scared?
The financial markets tell a story, the story of what we might expect in the future. Market movements come as the most popular narrative is decided. But that narrative can change and what once seemed so clear suddenly becomes less certain.
Many of the greatest fears this year haven’t yet come to fruition. Markets have proved themselves to bounce back in many situations. That makes the scariest investment of them all cash, not only do you take no risks, but you also remove all opportunity for earning anything, and inflation steadily eats into your savings. Sometimes the moment when we are most uncomfortable is when the best opportunities arise, provided you manage those risks by remaining well diversified.