The year of Brexit and Trump was extraordinary for a number of reasons - geo-political, macro-economic and markets-related. Global markets behaved erratically across asset classes with a mixed bag in global equities, a bull then a bear market in US Treasuries and Gold, a bear then a bull market in crude oil and correlation distortions caused in part by negative interest rates in EUR, JPY and CHF and poll-defying election results.
Yet, risk indicators remained subdued apart from a few spikes in Q1 and after the UK and US votes. The VIX index, currently at 11.27, is at the bottom of its historical range. The respected BAML strategist Mike Hartnett noted that the most significant financial event this year was the bottoming out of the 10-year US Treasury rate in July, which may mark a change in the direction of long-term interest rates after a 35-year downtrend.
The Unstoppable Trend Towards Transparency & Lower Costs
ETFs continue to hoover assets up with global AUM at $3.45trn, now well above Hedge Funds. Amid ongoing debate on the impact of digital on financial advice and money management, the FCA recently became vocal on the need for the asset management industry to reduce costs and increase transparency. The world, after all, is going digital - why should finance be an exception?
How to Position for 2017?
Markets expect the US to embark on a bold pro-business agenda that will steepen the yield curve and boost sectors such as financials, defence, infrastructure and oil.
Visibility in Europe remains low in the aftermath of the Brexit vote with key elections looming in France and Germany as well as QE slowing down. Many in Asia Pacific are anxiously waiting to see how the new US government will impact the region. Against this backdrop it seems sensible to remain disciplined, seek moderate exposure to equities and inflation-linked assets, and low / negative exposure to bonds. We continue to like the ALPIMA Stack strategies because of their positioning (low equity beta, negative duration) and recent performance.
We wish you all the very best for the festive period and the New Year.
May 2017 be not only a prime number but also a Prime Year.