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Investment Review - End of Year 2016

 

Financial markets have withstood a veritable barrage of political upheavals during 2016 and despite this tough background, investment returns have perhaps been surprisingly positive.

Early in the year the policy of OPEC to allow oil production levels to be maintained led to further falls in the price, to around $30 per barrel. This coincided with a weak first quarter’s economic activity in the USA and worries about the outlook for the Chinese economy, which combined to undermine investor confidence. A move by the Bank of Japan announcing negative interest rates also added to market worries. 

In the second quarter of the year the oil price experienced strong recovery to around $50 and this factor,  along with more reassuring signs from the US and Chinese economies, led to stock market recovery.

The unexpected result of the UK Referendum, with the majority of voters choosing to leave the European Union, prompted a period of market turbulence with weakness in sterling a feature. There was also a very strong rally in the UK Gilt market, with ten year yields declining to 0.6% at one stage. Initial investor concerns were soon replaced by an optimistic view of large multi-national companies, although the more domestically focused Mid 250 Index noticeably lagged on fears about the outlook for the UK economy. Action by the Bank of England, cutting interest rates to 0.25% and announcing measures to support bank lending, helped boost sentiment, along with the fairly rapid appointment of our new Prime Minister. Overall growth in the second half of the year has proved to be much more resilient than earlier predictions.

In the autumn investors were again subject to the impact of political change when Mr Trump was elected as US President. His rhetoric while campaigning gave rise to some concerns about a more isolationist approach, with trade tariffs and protectionism moves indicated, together with a different emphasis in international relations. Uncertainty surrounding his policy intentions persists, but in the short term markets have taken a positive angle, focused on Mr Trump’s economic ideas which include lowering company taxation and increasing infrastructure spending. In turn, this has generated expectations of higher inflation if a stronger economy ensues, with US ten year Treasury yields rising sharply to around 2.5%. A strong US dollar has been a feature of the fourth quarter, a renewed development which is generally seen as negative for emerging markets. 

Concerns about higher inflation have also been prompted by the strong recovery in the oil price during the fourth quarter of 2016. A major factor in helping the Brent price to reach $56.5 by the year end was announcement by OPEC in November to modestly reduce oil production, a policy which also gained support from some leading non-OPEC producers.     

In Europe rising populism is also a feature of the political scene and the Italian Referendum in early December duly led to a change of Prime Minister. There are important elections in Holland, France and Germany in 2017 which could lead to further concerns about the Eurozone outlook.  In addition to the migrant crisis, weak economic activity and the need to encourage banks to lend, negotiations with the UK to achieve Brexit could well prove problematic. 

Looking ahead, economic prospects appear uncertain. Mr Trump takes office on January 20th and it will take some time for his economic policies to be implemented: It is possible that any extreme spending plans could be restricted by Congress. The Federal Reserve, which raised interest rates again in December by 0.25%, look set to raise rates possibly by a further 0.75% during 2017 and increased borrowing costs in the USA will feed through to businesses and the mortgage market.

The UK Government’s Brexit plans are still being formulated and firm indications will not emerge until February. The current timetable involves invoking Article 50 in March and only then will serious negotiations with the other twenty seven EU members begin. In 2017 wage growth is expected to be muted while inflation is expected to move higher as the impact of lower sterling filters through, so the consumer spending growth is likely to recede from 2016’s relatively buoyant levels.  Business investment and recruiting are also set to slow as the private sector in aggregate looks ahead to more challenging conditions. 

Conversely, manufacturing exporters and international companies look generally well placed in the current environment. UK interest rates appear likely to be maintained at an ultra low level of 0.25% and a moderate level of inflation is often interpreted as positive for equity markets. Overall, well diversified portfolios appear appropriate given the uncertain background while a focus on sustainable income generation is another important consideration.     

30th December 2016 

Disclaimer: The information provided does not constitute investment advice or recommendations. Whilst we have taken all reasonable care to ensure that the information contained within this publication is  accurate, current and complies with relevant UK legislation and regulations as at the date of issue, errors and omissions may occur due to circumstances outside our control. Please note that past performance is not a guide to future performance and that the value of investments, and the income derived from them, may fall as well as well as rise and investors may not get back the full amount originally invested. Everys is authorised and regulated by the Financial Conduct Authority in respect of financial services No 120379.       

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