Fourth Quarter 2016
As At 31th December 2016
It’s fair to say that most investors would not have bet on a positive market outcome after a year which included Brexit, a Trump victory, and political turmoil in Turkey and Italy. However, equities have risen strongly over the year. Sterling remains weak and subject to ongoing volatility. Inflation seems set to return, and this has meant that bonds have at last begun to sell off. The year ahead seems beset with further uncertainty.
Many of the sectors that have led the markets up this year are those that have struggled in recent years, such as banks, mining companies and oil majors. They all rose in 2016, as the long term interest rate outlook improved, and commodity prices – iron ore, copper and oil – recovered. Oil stocks have risen over 30% globally, mining companies are up over 25% and financials rose 13.5%. Similar rises were seen in the UK which was particularly boosted by the post-Brexit fall in Sterling, with the total return over 2016 of 19.1% for the FTSE100. Around 70% of earnings of FTSE100 companies are generated overseas.
Trump’s victory has raised expectations that there will be substantial stimulus to markets. This may come from lower tax rates encouraging US companies with large cash balances abroad to repatriate them, and invest and acquire. Additionally, much of both Clinton and Trump’s campaigns set out ambitious programmes for infrastructure spend. Given the Republican sweep of the Presidency, Senate and House, these spending plans theoretically should find it easier to get passed.
The events of 2016 highlighted that political risk isn’t just an emerging market phenomenon. After a worrying start to the year, China seems to be less of an area of concern, and growth, while at lower levels, at least appears to be stable. Markets recovered after a sharp sell-off in February. Dollar strength can be broadly unhelpful to emerging markets, however, many of these economies have larger capital bases and less dollar-denominated debt compared to the Asian Debt crisis twenty years ago.
After Brexit, the UK bond yield bottomed at around 0.51% for 10 year paper. At these levels, we felt that bond buyers were either price immune or dangerously speculative. Yields have backed up as Sterling has fallen. Inflation is set to rise as the UK imports many goods and services. ‘Marmite-gate’ was probably the first public sign of this in 2016.
As investors, we have learnt to think beyond politics this year (as is reflected in our publication ‘Our Ever-Changing World’ delivered last week). There are some underlying trends that we feel are sufficiently powerful to deliver returns for investors no matter who is in the White House, or what shape Britain’s trading relationships with the EU ends up in. In portfolios, we look to deliver stable returns from infrastructure funds, whilst acknowledging that there is, selectively, good value in some government and many corporate bonds. We have tried to take advantage of sell-offs in robust, British companies that occurred in the months after Brexit. And we believe that valuations of several of these companies remains compelling, whether to us as shareholders or companies looking to acquire holdings here, such as we have seen with purchases of ARM holdings in July, and Fox’s proposed bid for Sky in December.
As ever, speak to your Portfolio Manager with any questions about your investments, and do refer to further insight articles.
Please remember that the value of investments and the income from them may go down as well as up and that you may not get back the amount originally invested. Past performance should not be seen as an indication of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.