As we move towards the end of 2017, it can be an appropriate opportunity to pause and review some of the market movements and developments we have seen in 2017. It appears at this late stage in December, that 2017 will stack up well versus history. However, as always, there was plenty happening under the surface.
The average figures of Investment Banks polled by Zurich Investment Management at the start of the year forecast the S&P 500 to end 2017 at 2349, or a growth figure of 4.9%. It currently stands (as at 19th December) at 2690, well above the average consensus. However, to review the above in isolation would be lax, and would be failing to acknowledge one of the main influences on the global equity markets during 2017 – the exchange rate fluctuations of the euro currency against the US dollar.
The weakened ‘Greenback’
The US Dollar is the most influential currency in the world and 52% of world equities are listed in the US. It is also worth noting that the Hong Kong dollar, which is pegged to the US dollar, and resource or ‘commodity’ currencies such as the Canadian and Australian dollars are also highly influenced by the ‘Greenback’.
Currency fluctuations are always an important consideration for investors in risk assets, and can be hard to avoid, whether directly or indirectly. The US dollar weakened by close to 11% this year versus the euro, in a move from 1.05 to over 1.20 at one stage (it stands at 1.18 today). This type of currency movement can lead to a direct reduction in the returns for Euro-based investors.
Global geopolitical risks
2017 also saw many geopolitical risks come to the fore, many of which ultimately subsided. There were elections in the Netherlands, France, UK and Germany, the triggering of Article 50, and a deterioration of the US/North Korean relations, to name but a few.
However, here at Heritage Wealth, one of our roles to cut through the ‘noise’ and to identify the key drivers in the global investment markets. The graph below illustrates how increases in volatility (chiefly due to political concerns) over the last number of years has not necessarily led to a substantial impact on stock market levels.
The global economy continues its recovery
What we have seen throughout 2017 is a gradual improvement in the global economic backdrop. The more synchronised global recovery seen in GDP and recent positive sentiment data has buoyed risk asset prices. This has led to double digit returns in equity markets across many regions.
Equity data and growth figures continue to be positive, and volatility levels are at records lows. However, if you look beneath the surface and focus on underlying sectors, there has also been an increase in dispersion. For example, the Tech sector has returned over 20% this year, whilst both the Energy and Telecom sectors have seen double digit falls. It is important therefore, in our opinion, to have a focus on investing across a diverse range of sectors, regions and currencies.
Equities versus Bonds in 2017
For many investment manager’s, a positive asset allocation towards equities over fixed income has broadly been a positive influence on their 2017 performance numbers, as fixed income markets have failed to repeat some of the robust gains seen in recent years.
Bonds, Interest Rate and QE
The expectation of higher interest rates, an increase in political risks, and an acceleration in global growth all weighed on European sovereign debt prices this year, whilst at the same time a more positive allocation to the global equity markets materialised. The ECB’s quantitative easing programme is ongoing, and was extended in October to December 2018, albeit at a reduced pace. This would support the view that whilst we do not see a huge uplift in bond yields, European sovereign debt offers little long-term value in the current environment.
Commodities & Volatility
Commodities, which tend to do better as economic growth expands, have seen a broadly positive year so far in local terms although, as most commodities are priced in USD, it is worth considering the impact of currency fluctuations in this area. Oil had a rollercoaster year and traded as low as $43 a barrel in June before rising to $57.76 (Crude Oil WTI) a barrel today.
Overall, it looks like 2017 will be another good year for investors who maintained a long-term outlook, and for those who did not get side-tracked by short term market noise and volatility.
We will be meeting with our clients in Q1 2018 to discuss our current views and the global outlook for 2018.
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based at 27 Cook Street, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
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