2017 proved to be in many ways a relatively typical year for global financial markets in that despite concerns at the start of the year - whether around politics or economics; the stock markets delivered positive returns in most major countries bolstered by broadly stable returns in bond markets.
Of course, 2017 had its share of relatively unique events. 2017 was the first year of the unusual Presidency of Donald Trump culminating in US tax cuts later in the year. The Bank of England rising interest rates for the first time in a decade. We saw ongoing conflicts, predominantly in the Middle East and Africa. The UK saw a close general election result. Alternative currencies such as Bitcoin rose (and sometimes fell) sharply in value.
An Unusually Smooth Year For Shares
2017 was fairly unusual in that the growth of global shares was relatively steady and consistent. Normally, we’d expect to see, based on history, the markets fall temporarily during the year by typically 10% or more, only to then subsequently rebound over time if history is any guide. Yet, in 2017 these declines did not happen. The UK was actually one of the more volatile major stock markets in 2017, but even here, any dips of around 5% or so were temporary and relatively shallow in comparison with history. In future years, we would not generally expect all major markets to move up in unison without significant declines as we witnessed in 2017, it was a notably smooth year for global markets.
The Risks Of Becoming Complacent
As an investor, it is important to not become too confident based on using 2017 as an example, because most years in history have seen at least temporary market declines. These declines aren’t necessarily something to worry about, because they don't always last long. Yet, they can be common and expecting the markets to move steadily up without major declines is perhaps too optimistic. History suggests we’ll see dips in subsequent years.
Market Performance By Country
In 2017, virtually every stock market grew, with the best performing major stock markets the emerging markets of India, China and Brazil. Though another emerging market, Russia, had a sluggish year.
The UK’s larger companies of the FTSE-100 index lagged other international shares, in part due to currency as the pound rebounded off the lows due to Brexit fears from 2016. The rebounding British pound and relative strength of markets outside the UK meant that the strategy of Moola portfolios in hedging certain currency risks and international diversification helped returns.
Of course the financial markets did see negative events in 2017, but they were smaller in scope that we may typically expect. For example, despite concerns about President Trump at the time of his election, the US markets rose steadily, or despite concerns about Brexit negotiations or electoral outcomes, the UK market was also up, though less so than for most other countries. China continued its impressive growth, in the year it held its 19th National Congress, despite some critics seeing imbalances in sectors of its fast-growing economy.
Trends Within Sectors
At the level of the global economy, the pattern of boom and bust was evident within different parts of the economy, even if overall growth appeared generally robust. For example, it was generally a good year for car manufacturers, and travel companies from hotels to airlines who continued to enjoy strong sales. However, it was a more challenging year for certain retailers who continue to wrestle with the trends of discount competitors and shopping moving online. Energy companies generally had a weaker year as the oil price remained relatively subdued compared to the past decade, but ended on a high note as the oil price approached 2-3 year highs in December. Elsewhere in the commodity markets, gold had a relatively positive year in 2017 as ultimately did many commodities from copper to coal.
Against strong returns for shares, returns for bonds were more muted, as is often the case in good years for stocks. Many major economies, including the UK, moved to raise interest rates, which is generally a negative for bond prices. Nonetheless, despite this, fixed income returns were generally slightly positive. The role of bonds in a portfolio is often considered to be providing stability at times of market turmoil and in 2017 bonds offered a satisfactory return without needing to serve as a potential counterweight to a weaker stock market.
Looking To 2018
As we look to 2018 we have no crystal ball, and continue to believe diversified, low-cost portfolios with investments spread across geographies and asset classes offer the prospect of long-term robust returns. This has been the case not just in 2017 but over much of the past century for financial markets for those who have multi-year time investment horizons.
We are currently appear to be in a relatively positive global economic environment, though that can change quickly. Asset valuations are also relatively elevated in many areas compared to history, though still likely implying positive long-term returns, this may point to slightly lower returns going forward than we’ve seen in recent years.
At Moola, we are excited for 2018 and we expect to continue to deliver innovation for you as part of Moola’s award-winning investment service. Thanks for being part of that journey.