Last year can be described as a year full of political noise, but ultimately, investors held their nerves and continued to push risk assets higher. Looking ahead, what lessons can we learn from 2017? It was a year that started with the United States (US) President Donald Trump finally taking office on 20th January, with markets positively waiting to see how he would deliver significant market-friendly fiscal stimulus. However, his approach to politics brought a number of concerns too, ranging from the deportation of illegal migrants to potential trade wars with a number of countries.
General elections results in many major European member states were the cause of some volatility for most European exchanges, since the risk of having populist government in major countries posed a threat to the survival of the monetary union. Political risk in Europe caused government bond yields to rise and prices to fall in France and Italy ahead of the French presidential election. As the French electoral risk subsided, both markets rebounded strongly, and ended the year fairly positive.
As the year progressed, the British Prime Minister Theresa May called a snap election which proved to be near fatal. Similarly was her party’s poor campaign and a backlash against her vision of a relatively hard Brexit which cost her party its majority in the House of Commons. The only positive aspect was the extension of her term in office, and continued talks between the United Kingdom (UK) and European Union (EU). Later during the year, the EU agreed on a joint progress report on citizens’ rights, Northern Ireland, and the divorce bill. This allowed the EU Council to recommend opening the second phase of negotiations, which will include the framework for a future trade relationship. This helped the pound to recover some of its losses through the year. According to European Central Bank (ECB) capital flows data, the UK also enjoyed significant flows from Europe, as investors sought to beat the low yields on offer in core markets. This helped keep a cap on gilt yields, and provided a return of 2.7%.
In 2017 developed market monetary policy by Central bankers continued to tighten. However, in addition to the US Federal Reserve’s (Fed) hikes, other central banks joined in, notably the Bank of Canada and the Bank of England. The ECB kept quantitative easing (QE) going, but did taper its purchases during the year, and announced a further tapering and extension for 2018. In China, the 19th National Congress of the Communist Party of China was held, which ultimately cemented President Xi Jinping as one of the most powerful Chinese leaders in modern history, and further consolidation of power is expected in his second five year term.
Back in Europe, Germany’s general election ended in a stalemate as expected, with Angela Merkel’s CDU/CSU coalition continuing to dominate. Many expected Merkel to form a coalition, but coalition talks broke down later in the year.
As the year drew to an end, the hyperbolic rise in the value of bitcoins drew the attention of the public and investors. The crypto-currency has been around for some time, and one of the attractions of bitcoins is the decentralised structure of the system as it is not run or managed by a central bank.
Looking across the major asset classes, equities were the best performing asset class by some way, with a largely smooth year of gains. In the US, the S&P 500 Index, Dow Jones and Nasdaq registered a growth of 18.87%, 24.72% and 27.09% respectively.
Indeed, European exchanges performed well, with the Euro First 300 up 7.35% and the Euro Stoxx 50 ending the year 7.10% higher. Frankfurt and Paris led the main European exchanges as they both posted gains of 12.81% for the DAX and 9.80% for the CAC 40 in Paris. More positive performance also came from the UK as the FTSE 100 and the FTSE 250 both had a good year with a growth of 7.97% and 14.96% respectively.
As we start off the New Year, concerns about Trump’s policies linger, but investors appear to have focused on the potential gains for corporate profits. Markets continued on their positive trajectory. The S&P 500 Index pushed its gain in 2018 to record levels, while small caps and tech shares rose to all-time highs. The Dow Jones Industrial Average also hit a record in the first weeks of the year. In the US, the 10-year Treasury yield fell to 2.53%, while 30-year yields slumped, sparked by rising concerns on inflation and the potential for fewer purchases by China.
In Europe bets that the ECB may further scale back monetary stimulus this year are helping to spur confidence in the euro, while weighing on a rally that has taken stocks to a three-year high. The single currency also got a boost last week from signs Germany is making progress in forming a coalition government, an important development for investors in the coming weeks.Published on The Times of Malta on Sunday - 21 January 2018