2016 has been collectively decried as one of the worst years in recent memory. The relentless carnage in Aleppo, an unusually high string of dead music and acting icons, plus a dispiriting and divisive US presidential race, are just a few reasons why the year will remain shrouded in infamy for years to come.
But against all odds, it hasn’t been the worst year for financial markets, nor the global economy. In fact, it has been a pretty good year considering the countless political stumbling blocks – Brexit, the US election and Italian referendum – that were expected to plunge markets into chaos.
And even more baffling to analysts and investors was that equity markets’ recovery time seemed to get progressively quicker with each new shock to the system.
“The noise after Brexit lasted about a week,” recalls Brewin Dolphin head of fund research Ben Gutteridge.
“Investors should be going into 2017 prepared for surprise outcomes that are much more negative than the ones we have seen in 2016.”
“Short-term traders were selling, which created a bit of noise but long-term investors eventually came back and dominated. And then markets received the news that Donald Trump, an unknown quantity as a politician, had been elected President of the United States. Instead of a week or weeks, the noise and negativity lasted a matter of hours.”
While Gutteridge thinks that Brexit desensitised markets months before Trump, allowing for a quicker recovery after the US election, he thinks there are individual reasons to explain the rally in equity markets.
“Collectively, it does smack of political destabilisation and chaos, but individually, you can rationalise why equity markets have responded so favourably,” he said. “Though international investors lost money on sterling denominated companies because of Brexit, UK-based equity investors would have reaped the rewards of globally focused companies with overseas revenues. And following this, earnings expectations in the UK have moved higher.”
“In the case of Trump, though there is a degree of nervousness around his geopolitical strategy, the tax cuts he wants to implement should feed through in the short-term for better bottom-liners. Overseas earnings helped UK equity markets weather Brexit; Trump’s tax cuts helped US indices.”
BMO Global Asset Management co-head Garry Potter thinks investor psychology likewise played a key role in shaping markets’ robustness.
“Stock markets always anticipate,” said Potter. “They buy the rumour and sell the fact. When you think of what Trump stands for – anti-globalisation, protecting US jobs, repatriation of foreign cash and the commitment to spend on infrastructure – that is all helpful to stimulate economic activity. That is why we have seen the reaction we have.”