Economic Snapshot – 2016 Review & 2017 Outlook
In hindsight 2015/16 proved to be a volatile year of repeating mini crisis’. Despite the erratic political and economic news, we still enjoyed modest growth in most of the traditional main stream asset classes. This ended up coupling nicely with some surprisingly buoyant returns in bonds, small cap equities and listed property. Although this was an impossible task to foreshadow at the beginning of the year, diversification into what is traditionally the more volatile areas proved beneficial for investors.
Overall the year seemed to be full of new surprises, triggering bouts of volatility in equity markets and ever lower sovereign bond yields. It started with China’s devaluation in August 2015, shortly followed with OPEC’s decision to push the price of oil down to regain lost market share, and then extenuated with the Federal Reserve [Fed] in the USA generating on-off again messages about lifting interest rates. Finally, we had the surprising Brexit vote with the UK referendum deciding to withdraw from the European Union. Not surprisingly, this all undermined investors’ confidence in the global economy. However fears of imminent recession proved overdone as global growth slowed and resilience emerged in keeping with economic fundamentals. Some would say a victory for the economists.
In this very unusual environment investors continued to seek yield (Real Estate Investment Trusts and Infrastructure) while avoiding riskier growth assets (Emerging Markets). The US cash futures market ended the year pricing in no further move from the Fed for the better part of the next two years. Many commentators feel this is overly pessimistic and believe it’s likely that the Fed will have to take some cautious tightening steps in the coming year.