2016 has been a year of shocks in many respects and has rocked both politics and the financial markets, surprising investors over and over again with unexpected outcomes.
January: China’s woes
The year started with volatility, and ‘volatile’ is perhaps the best word to use to describe 2016. In January, global markets suffered a panic sell-off, led by Chinese stocks which fell more than 7% in a day on the first day of trading in the New Year, triggering a mechanism that suspended trading in Chinese shares for the first time. China’s woes hit emerging markets hard, while the S&P 500 and Nasdaq in the US posted their worst start to the year since 2001.
But this was only the beginning…
In June came one of the biggest shocks experienced by the European Union in recent years, when Britain voted to leave the EU in its historic Brexit referendum. However, markets did not react quite as expected…after substantial falls that lasted a couple of days, European and UK equities rebounded strongly, so many investors were rewarded with meaningful gains despite being “wrongly” positioned going into the Brexit vote, given its outcome was so unexpected.
November: An unpredicted US election win
Towards the end of the year came another big shock – Republican candidate Donald Trump won the battle for the US presidency, an outcome that was also not predicted by any polls! But again, key developed equity markets faltered only briefly, while the US market rallied on expectations of higher economy growth and better financial conditions under a Trump presidency.
Bond markets vs Equity markets
Yet despite all this volatility, investors have been becoming more and more bullish, which reflected in their buying activity, with bond markets suffering continued sell-offs, while equity markets enjoyed overall inflows. By November, European-listed equity ETFs saw the largest inflows in 11 months, taking in some €7.6bn during the month.
Interestingly, the best performing equity ETFs during the year were Brazilian and Russian ETFs, such as Direxion Daily Brazil Bull 3X ETF, which topped the charts with a 167% return; the ProShare Ultra MSCI Brazil Capped, which returned 127%; and the VanEck Vectors Russia Small-Cap ETF, up 104% (according to Morningstar). Both countries were supported by a rebound in commodity prices, while Russia has also seen a boost from the victory of Donald Trump, which many expect will lead to improved relations between Russia and the US.
Low volatility products lost favour against smart-beta strategies
Meanwhile, low volatility products designed to limit losses in times of market stress lost favour with investors. A report published by State Street Global Advisors (SSGA) in the third quarter revealed investors had instead started tipping their toes into value smart-beta strategies, after years of outflows. SPDR said it has particularly seen inflows into energy sector funds, which is traditionally considered a value sector, while other advisors and fund providers are also noticing a shift in investor behaviour.
Meanwhile, investors did put a lot of money into gold in the first three quarters of the year, but the victory of Donald Trump caused large redemptions from gold ETFs, as investor felt there was no longer a need to hide in safe haven asset classes. In December, some of the best known gold ETFs saw double-digit losses, but gold has been rebounding towards the end of the year. As uncertainty still reigns over the world, the shiny metal may yet see renewed demand from investors.
What does 2017 have in store?
2017 may well bring more political turmoil, as many European countries prepare for key elections, while President-Elect Donald Trump counts down the days before he officially takes up his position. With so many important events in store, 2017 could prove to be another year of volatility, and it remains to be seen if investors’ confidence will continue throughout January and beyond.