In 2016 sterling-based investors enjoyed the best year for multi asset returns since 2009, the year of the initial bounce back from the financial crisis.
A balanced multi asset fund would have returned something like 12% over the year before charges, with all of the major asset classes showing positive returns over the year. Strong returns are unusual this late into an economic expansion but the two political shocks of the year turned out positively, at least in sterling terms.
The aftermath of Brexit saw a big (17%) devaluation in the pound against the US dollar, which raised the value of overseas equities and commodities. The weak pound boosted UK equity returns by almost as much, with 80% of FTSE 100 earnings coming from overseas. Meanwhile, gilts rallied sharply on the Brexit vote as the Bank of England eased monetary policy, though much of that rally has since unravelled.
Following the US election, stocks got a boost from expectations of large scale fiscal stimulus under President-elect Donald Trump. Signs of a pickup in the pace of growth in the US and world economy, pre-dating November’s election, also boosted earnings expectations.
Emerging market equities were up 35.3% and commodities returned 33.3%, the best performers of 2016. The worst performers were UK commercial property, which returned just 1.4% up to November, and cash which was up 0.4%.
Cash continues to burn a hole in the pocket. Interest rates have consistently been set at or below the level of inflation since the financial crisis, causing savers to lose money in real terms. Over the seven years since January 2009 cash has returned a cumulative 4.8%, the sort of interest you’d have expected to earn in a single year before the financial crisis. Over the same period, the cost of living increased by close to 20%.
In comparison, an investment in a mix of equities and property more than doubled your money while a typical multi asset fund would have returned about 80% before charges.
We expect the positive investment backdrop to continue in 2017 with global growth strengthening and interest rates remaining below the level of inflation. That said, political shocks are likely to create volatility with an unpredictable populist in the White House and a crowded electoral calendar in Europe.