Investment Insights: 2016 in the rear-view mirror

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following are excerpts from the Quarterly Strategy Letter (4th Quarter 2016) produced by the Global Investment Management team. For the full report, click here.

Major asset classes posted stellar results for investors in 2016, with the vast majority ending in positive territory.

Closeup of "2016" written in sand, with an incoming ripple of water about to wash over it.Global equities, as represented by the MSCI All Country World Index, recorded an 8.48% return led by U.S. equities and certain emerging market countries. Meanwhile, bonds also had a respectable year with a 3.91% return on the Barclays U.S. Universal Bond Index. Much of the return for the index was derived from outstanding performance in the U.S. high yield bonds space which returned 17.13%, based on Barclays data, helping to combat rising interest rates during the latter part of the year.

Finally, alternative asset classes were a mixed bag with the Bloomberg Commodity Index seeing an 11.77% increase for the year, led by oil which started the year trading at $37.04 per barrel and rose to $53.72 per barrel by the end of the year. The price of crude for the year was a boon for investors holding a basket of commodities with exposure to the energy markets.

U.S. equities trump international

Another up year is in the books, and 2016 was the eighth consecutive calendar year to have a positive total return on the S&P 500 Index! This time around the U.S. large capitalization index posted a resilient 11.95% total return with 2.41% coming from dividends and 9.54% from price appreciation. Amazingly to some investors, S&P 500 companies gained more than half of the total calendar year return, 6.7%, in the 45 trading days after the presidential election. This was likely due in part to the potential fiscal policies on the then-nominee’s docket.

While Trump’s victory was a big surprise for some voters, it surprisingly did not startle the markets as much, based on the reaction the night of the victory and in the following days and months.

Fringe economies aren’t so fringe

Emerging markets were the surprise victor among major equity markets, with the MSCI Emerging Markets Index up 11.27% in 2016. Cheaper valuations versus other major markets, combined with monetary policy shifts abroad, or lack thereof, contributed to the rise in emerging economies. Although the group had a strong year, the fundamental economic data didn’t do much to support the rally. Much of the return came from two of the largest “BRIC” members, Brazil and Russia. Brazil finished the year with an incredible return of 66.74% while Russia also soared 55.94% higher, according to MSCI data. China and India, some of the largest allocations within emerging markets indices, were up just over 1% for the year based on the same data.

Examining portfolio positioning

Although many investors see many equity markets being at or above fair value, the improvement in economic growth data still supports an overweight allocation to equities in aggregate and when compared to some of the other asset classes; our strategies remain marginally overweight equities. Low interest rates across the globe, fiscal stimulus measures in some countries, and consumer sentiment and business confidence continuing to improve make a case for remaining overweight to the equity asset class despite some valuation measures.

On the fixed income side, it was a good year to be underweight to interest-rate risk in bond portfolios as well as to have a higher-than-benchmark allocation to high yield or floating rate notes, as these assets fared well for bond investors. The Global Investment Management team held, and continues to hold, a marginal underweight to duration, or bonds sensitivity to interest rates, with an overweight to spread (non-Treasury) products like high quality corporate debt and U.S. mortgages.

Read the full Quarterly Investment Letter here.

Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation does not ensure a profit or guarantee against loss.

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