Paul Glover’s market review
NFU Mutual’s chief investment manager Paul Glover has 30 years of professional experience in investments. Here he gives his views on how the investment markets have performed in the fourth quarter of 2016.
Leicester City winning the Premier League and the UK taking the momentous decision to leave the European Union had already made 2016 a year of unexpected events, but November completed a remarkable treble with the improbable electoral success of Donald Trump in the US.
Markets had been very wary of both Brexit and a Trump victory beforehand, but the other unexpected development of 2016 was the quick reversal of negative market reactions to ultimately leave the year seeing strong levels of returns from most asset classes, especially for UK based investors.
A well received Trump acceptance speech helped markets focus on the potential benefits of his proposed policies on tax cuts, reduced regulation and increased infrastructure spending whilst worrying less about his previous comments on areas such as free trade that would be more challenging for markets.
Alongside already improving global economic and corporate data this helped equities achieve further growth in the fourth quarter but bond markets lost some of their previous gains as inflation expectations grew and the prospect of monetary policy normalisation increased.
In the fourth quarter UK equities gained 3.9%, which took index returns for the year to 16.8%. Gains were driven by the boost to companies from the decline in sterling and recovering commodity prices alongside benefits from the improving global outlook and the UK economy continuing to fare better than many had expected.
Currency moves also continued to have a strong impact on overseas asset returns, helping to boost fourth quarter and 2016 returns from international equities to 7.1% and 30.4% respectively. All regions saw positive returns and the US led the way over the quarter with gains of 9.0% and emerging markets saw the best annual returns at 35.4%.
The long bull market in bonds saw a partial reversal in the fourth quarter as yields moved up from the exceptionally low levels seen during 2016. Quarterly losses of 3.4% for gilts and 2.6% for corporate bonds took 2016 returns to 10.1% and 10.7% respectively.
The commercial property market remained cautious after Brexit related volatility and liquidity issues saw valuations fall in the third quarter. Modest gains are estimated for the final quarter and the year as a whole.
With the UK interest rate remaining at 0.25% throughout the final quarter returns from cash deposits remained very low.