Posts tagged ‘historic returns’
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.
With 2014 now a few days old it is time to have a look at what markets delivered during 2013. (All returns data is given in GBP terms.)
The risk-on pattern established from the summer of 2012 continued, with the MSCI World Index returning exactly 25%. Of this, 23% had been reached by the time of the Japanese market crash towards the end of May. Risk-on was highly selective, however. By the same point, the MSCI Emerging Markets Index had lagged on concerns over growth in developed markets, delivering only 8.1%. EM took a particularly hard battering in the weeks that followed. With recovery into year end only partial, returns for the whole period were modestly negative and trailed the World Index by a staggering 29.3%.
Variety within these numbers was enormous. While markets in Nigeria, Bulgaria and Argentina all returned around 40-45%, stock indices in Brazil, Turkey and Peru lost around 30%. Among developed markets the US did best, delivering 29.7%. The Nikkei 225 and Euro Stoxx 50 were close behind, returning 26.5% and 25.8% respectively; and the FTSE 100 turned in a most respectable 19.2%.
Major government markets generally had a poor year. The 10-year gilt yield rose by 1.2% to close at 3% – exactly the same story as for the 10-year US treasury. Japan did better, closing broadly flat at 0.7%, and Germany wound up somewhere in between, with the 10-year bund yield creeping up from 1.3% to 1.9%.
In returns terms the top performers came from the eurozone periphery, with the Greek market delivering an extremely un-bondlike 40%. Spanish and Irish markets returned 14%, paltry by comparison, but again, rather extraordinary for government markets. Allowing for currency weakness the poorest performers were South Africa, Australia and Japan, which lost 18-20%; in local currency terms, however, it was the big developed markets which fared worst.
Credit generally had a storming time. The iTraxx main index of European CDS prices registered a fall in investment-grade spreads from 117bp to 70bp, only 5bp above the post-crunch low seen in January 2010. The crossover index, a measure of high yield risk pricing, saw spreads fall by almost 2%, smashing through similar lows to reach 282bp, a level not witnessed since late 2007. The exception was emerging market sovereign debt. Here, the BofA / Merrill Lynch index of hard-currency-denominated bonds from EM issuers saw spreads rise from 248bp to 297bp with the weakness concentrated in the first half of the year.
After a shaky start the pound had a respectable year, closing 1.7% higher on a trade-weighted basis. It was little changed against the dollar and the euro (about 2% stronger and 2% weaker respectively), though put on 19% against the yen. In fact, only a handful of what Bloomberg calls the “expanded majors” beat it, with the top performer in that basket being the Israeli shekel, which topped sterling by 5.5%. The Chinese yuan, subject as it is to a policy of gradual, managed revaluation, gained 1% against the GBP, and a couple of the emerging European countries squeaked a little higher too.
At the bottom of the pile the action was much more dramatic: emerging market currencies from South America to the Far East tumbled by as much as 20+%.
Appearing as they now do on various currency screens it seems appropriate to link this section with the last one by starting out with a look at gold and silver. And what an unpleasant sight meets the eyes: gold dropped by 29% against the pound and silver by 37%. In fact, in its “home” currency of US dollars, gold saw a twelve-year bull run end in 2013 and its biggest yearly percentage fall since 1981. (The latter point also goes for silver.)
It was a quiet year for oil, with the near Brent future flat over a year which saw price volatility reach some key lows. More interesting was the gas market, with the NYMEX future rising by 26%, its second consecutive annual increase.
Less interesting from an investment point of view but of some economic interest, the Bloomberg index of industrial metals prices dropped by 8% while the Baltic Dry Index of freight more than tripled (+226%).
Last, but for UK investors especially, far from least: bricks and mortar. The Nationwide index of house prices for December was out this morning and showed an increase of 8.4% on the year, the highest rate since June 2010.
Commercial property has had a duller time. IPD data for December is not yet available but the trend in recent months has been positive and we are on course for an increase in capital value across all sectors (retail, office and industrial) of about 2.5% for the year. Interestingly, this index remains 36% below its 2007 peak, and lower even than the previous high reached in 1989.
In Conclusion …
2013 presented investors with a decidedly mixed bag of results. Past performance is of course no guide to future returns and it would be otiose to extrapolate from or over-interpret them. What is clear, however, is that trends in some markets have been much more pronounced than others; and although much market behaviour has been logically and intuitively correlative, in some cases these trends have diverged to the point of incompatibility. Should they reconverge in 2014 it could be a good year for investors – if we manage to find ourselves on the right side of the reconvergence …
As Greece flirts with economic suicide and JP Morgan loses $2bn under the carpet, it is worth revisiting the subject of safe havens – those assets that receive attention from time to time as possible ports in a storm. We last looked at this back in July 2011, covering various government bonds, currencies, commodities – and cash. Events since the summer give us the opportunity to see how safe these havens really proved.
Starting with government bonds: lots of these went up. 10 year US Treasuries yielded 2.74% at the end of July; they now yield 1.86%. The equivalent German yield has fallen from 2.45% to 1.51% and ten year gilt yields from 2.80% to 1.95%. As well as coupon income over the period, therefore, investors in these kinds of bonds would have seen capital appreciation of the order of 7-8%.
Of the major currencies, the strongest was the dollar, which has risen 6.5% since last July as measured by the Bank of England’s trade weighted index. Sterling almost managed to keep pace, rising 5.9% on the same basis, and the yen drifted a bit higher too. The Scandinavian currencies softened slightly (-0.4% to -1.8%), dollar zone rates fell by a bit more (-3.6% to -5.4%), the euro lost 5.7% and the biggest faller was the Swiss franc (-7.9%).
The major commodities for which haven status is claimed are of course precious metals. Gold shot up during the stock market crash in August, reaching a peak of over $1,900 before falling back again to $1,580 today – about 2.4% lower over the period as a whole. Silver has performed dismally, losing over a quarter of its value at the same time.
Cash of course would not have lost its value. Banks have continued to fail since July (e.g. Dexia), but there have been no losses to retail deposit holders.
It would be unwise to draw anything axiomatic from this information, but tentative lessons might include the following:
- If the banking system does not implode and one’s appetite for volatility is low, then cash is an obvious choice in a crisis. (Nonetheless, the UK Retail Price Index was 2.6% higher in March than it was eight months previously. This annualised inflation rate of 3.9% would have been impossible to match with a cash deposit rate.)
- Currency views are genuinely speculative and exchange rate movements over a length of time such as 8-9 months are completely unpredictable.
- The claims made for precious metals are exaggerated.
- The most effective hedge against panic is government bonds (though only those seen as safe).
Of course every situation is different and the next crisis is unlikely to look much like the last. Perhaps the most robust conclusion remains the one we reached in July: that caution needs to be exercised. What looks like a hedge at first can sometimes be the edge of a cliff.