With 2016 almost at an end, I thought I would take the opportunity to reflect on how major asset classes have performed this year, focusing on the key inflection points that have determined the course of client portfolios.
Given this year has been particularly good for sterling investors, it can be easy to forget what a rough ride markets had to begin with.
Fresh from the wobbles in the second half of 2015, the first six weeks of the year were close to panic – Chinese debt was back in focus and there was a sense that the wheels had finally come off the world’s growth engine. Newspapers reported it was the worst start to markets on record. A great time to be holding gold and sovereigns in a very traditional risk-off mode, which saw equities get a bit of a hammering.
Of course, if you had the right contacts in the Chinese government, you’d have known their solution to the problem would be to pile on even more debt. In two short weeks the falls in the equity market had fully reversed, and people piled in to emerging market equities that appeared cheap, assuming you were prepared to ignore the lingering debt problem.
Sell your gilts, fill your boots with emerging market equities… that is, for about eight months, until the emerging market rally ran out of steam, and was then hit hard by the election of Donald Trump. Markets initially struggled to build a consensus from the shock result, with equities, bonds and the currency whipsawing in response to another ‘anti-establishment’ candidate.
One thing was clear, though: the future US administration was not likely to be a Sinophile, despite following the borrow-now-worry-later theme from earlier in the year – cue the trade out of anything related to emerging markets and US Treasuries, into developed market equities.
The EU referendum provided another shock result where the trade was simple, borrowed and adapted from a joking Andy Murray, ABS: Anything But Sterling. The FTSE 100 might have been the best performing major large-cap equity market but, due to the sharp falls in the currency, you’d have been better off holding US, European or Japanese equities – currency trading rather than equity investing.
So, with perfect pre-hindsight, it was easy to maximise returns by aggressively trading around these inflection points. Sadly, I don’t have perfect pre-hindsight nor access to a time machine, so I’m left with the same uncertainty as everyone else. When there are major market events, investors often ask, “what should I do with my investments because of x?” – and nine times out of 10, the answer is simple: avoid the knee-jerk reaction, but reassess the fundamental investment case; has anything changed?
While we do make changes to our asset allocation over time, it is based on changes to our long-term fundamental outlook. Market timing is almost impossible to get right, and investors in portfolios that are diversified by asset class and geography have generally benefited from the broad market movements. It has been a year for multi-asset investment, one which has emphasised the importance of having exposure to various asset classes at different levels.