2016: By The Numbers

06/01/2017 at 6:47 pm

The year just gone was noteworthy for its political surprises. Events of great magnitude such as the Brexit vote, the election of Donald Trump and the collapse of the Renzi government might be marked “good” or “bad” according to taste; under “ugly” the threat of terrorism reminded us of its presence by way of some glaring atrocities in Nice and elsewhere. Markets, too, were haunted by fear for much of 2016. We began the year apparently convinced that the financial world would be eviscerated by a Chinese economic collapse, or sequel to the global banking crisis. But while they were haunted by fear markets were not to be governed by it – at least not exclusively.

After some periods of exceptionally high volatility most major stock markets closed the year higher. The S&P 500 returned +11.8%, the Nikkei 225 +2.1% and the Euro Stoxx 50 +4.4%. Leading the pack was the FTSE 100 with +18.6%, its highest return for any calendar year since its recovery post crash in 2009.

As many observers noted – especially those inclined to file Brexit under “bad” – this stupendous performance was to a large degree attributable to translation effects, with much of the large cap index’s earnings coming from abroad. (The FTSE 250 by way of comparison did +6.5% – nothing to be sniffed at but clearly not so much a beneficiary of the weak pound.)

And how the pound did weaken! It lost 16% of its value against the dollar, 14% against the euro, 18% against the yen and 15% against the Swiss franc, its worst performances since 2008.

The distorting effect of the currency on the return profile of international assets to sterling investors was accordingly enormous. The MSCI indices for the developed and EM worlds returned +8.0% and +11.2% respectively last year; in GBP terms those figures rocket to +28.9% and +32.7%.

Look at the EM equity markets individually and the effect was compounded in certain cases by currency strengthening on the other side. The Bovespa Index (Brazil) had a great rally in local terms anyway, up 39%. Since the real also had a super year its sterling terms return was +105%.

Brazil (and Russia) were helped by a recovery in commodity prices which had seemed unthinkable at the start of the year. Oil, whose price collapse had been so very influential, rallied strongly with the near Brent future rising +52.4% (+81.9% GBP). Natural gas did slightly better. The other start performer in commodity world was zinc, up 61%, reflecting renewed demand for steel in China. Other indicators of global economic activity also enjoyed a buoyant 2016 overall, with the Baltic Dry freight index up 101% and the WCI Composite (container) index putting on +65%. At the other end of the pile were some of the other base metals and gold, which did only +8.6%, despite some shows of promise during the year’s various periods of panic and confusion.

With risk assets having more than recovered themselves and energy prices up significantly overall, one might have expected the key bond markets to suffer. As indeed they did – but only into the closing weeks of the year. This turned out not to be enough to take the shine off the massive, record-breaking rallies they were able to set when the sky was falling in. The BofA ML conventional gilts index returned +10.6% last year, while their index-linked cousins trounced even the FTSE 100 with a return of +25.2%. Germany and Japan also saw positive returns (+4.1% and +3.3%), and even the US, where yields were boosted by Trump’s victory, saw an overall positive TR of +1.1% (or +20.6% in sterling terms).

Hard currency emerging market bonds outperformed on the back of spread compression to deliver +9.0% (reflecting a mix of dollar and euro exposure). But the real winner in the credit space, outperforming equity even in the positive year that was 2016, was high yield. The US HY index delivered +17.5% last year (+40.1% in GBP), with euro HY putting on +9.1% (+26.3%).

Finally, property. This was a mixed bag, depending not least on how one approached investing. Anecdotal fears of a negative Brexit effect into the summer were borne out by IPD data on commercial property, with UK prices falling by over 4% to September from their February peak. They recovered very slightly into year end, however, and with rental yield on top the asset class managed a positive total return of +2.6%.

If one had bought REITs rather than buildings, however, the story was different. Falling price/book ratios as sentiment deteriorated saw the sector deliver -7.0% – along with the Chinese stock market, one of the very few negative numbers delivered over the twelve months as a whole. Meanwhile, housing pursued a different path altogether, with residential property prices for the UK still rising at a pace of +6.9% over the year to October.

2016 was a truly extraordinary year in many areas, and asset class returns was one of them – especially for those of us with sterling as our reference currency. It started out as Armageddon, but as these numbers show, the hard thing for investors in hindsight would have been to avoid making money.

Does this mean markets are heading into the New Year with a false sense of confidence?

We will know for sure in another year’s time.

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