Opinion Leaders
2016 Review – A Year of Two Halves Part I
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Dr. Jan-Carl Plagge, Head of Applied Research
Stocks ended 2016 in a much different tone from that of January, wrapping up a positive year despite a string of political shocks.
Investors may remember 2016 for its two opposing ends: bears got the upper hand in January and February with one of the worst starts to a year in history; by December, however, share prices reflected the euphoria of a potential new era of growth and benign inflation.
Amid the difficult months, the virtue of patience paid off. The STOXX® Global 1800 Index rose 10.2%1 in 2016 after slumping 15.2% between Jan. 1 and Feb. 11. Surprisingly, most of the gains followed the unexpected EU referendum result in the UK and the election of Donald Trump as US President. The STOXX® USA 900 Index climbed 14.6% in the year, rebounding from an 11% slump through February.
The EURO STOXX® 50 Index fared less favorably but also swung from negative to positive. After plummeting 18% between Jan. 1 and Feb. 11, the index snapped a 3.7% annual gain through December. The STOXX Europe 600 Index advanced 1.7%.
In a year characterized by disappointing growth outside the US, the Chinese devaluation, and the shock outcomes of key political votes, equity gains proved to be the real surprise. Investors have reportedly bought into the asset class in anticipation of an acceleration in economic growth and consumer prices this year.
High Dividends
High-dividend stocks were in demand in the year. The STOXX® Global Select Dividend 100 advanced 13.6%. In Europe, where returns on government bonds were at record lows, high-dividend payers outperformed significantly, with the EURO STOXX® Select Dividend 30 gaining almost 12% in the year.
Despite the UK’s EU exit vote, an Italian referendum that went against the government’s plans, and concerns about the capital strength of German and Italian banks, the VSTOXX® Index, a measure for volatility (and uncertainty) derived from options based on the EURO STOXX 50, touched in December the lowest since July 2014.
Minimum variance
The STOXX® Global 1800 Minimum Variance Unconstrained Index displayed a significantly lower drawdown compared to its parent index during the bearish market environment in early 2016. Mainly driven by this resilient behavior, the index outperformed the STOXX Global 1800 over the course of 2016 until Trump’s victory set off a rally in sectors such as financials, which are relatively underweighted by low-volatility strategies. Still, the STOXX® Global 1800 Minimum Variance Unconstrained Index rose 8% in the year.
Sector allocation
Industry returns had a clear ‘cyclical’ tilt. The following table ranks the 2016 performances of the top three winners and losers among 19 supersectors in the STOXX Global 1800 Index.
Monetary Policy
Once again monetary support was a determinant background for financial markets. The US Federal Reserve waited until December to proceed with the second interest-rate increase in a decade. The European Central Bank (ECB), meanwhile, in March cut its key interest rates, increased and expanded its asset purchase program to include corporate bonds, and introduced a new series of cheap loans for banks.
Output cuts
After slumping 65% between April 2011 and January 2016, the basic-resources space returned from the abyss as commodity prices reacted to widespread output cuts. Investors reassessed the outlook for an industry where inventories have been drawn down, and re-considered the prospects for China, the world’s largest importer of industrial metals, where the government has focused on growth policies.
Energy shares benefited after oil prices rebounded from the lowest levels in 12 years. The STOXX Global 1800 Oil & Gas Index rallied 51% from a five-year low in January 2016. After months of protracted negotiations, the Organization of the Petroleum Exporting Countries (OPEC) agreed in November to its first production cut in eight years.
At the opposing end, the STOXX® Global 1800 Healthcare Index lost 5.7% as investors sold drug-makers’ shares citing concern that a victory for Democrat candidate Hillary Clinton would lead to caps on drugs prices However, the sector failed to recover after Trump’s victory as investors favored more economic-sensitive industries.
This is the first installment of PULSE ONLINE’s review of 2016. A follow-up article will analyze the performance of strategies around bonds and currencies.
1 All quoted performances are net returns in euros, except for the STOXX USA 900 Index, which is in US dollars.
