PERSONAL ACCOUNT

If there is one trend that will dominate investing in 2017, it is this

Remember the RBS economist who this time last year warned investors to “be afraid” and “sell mostly everything”? In a note dated January 8, he and his team predicted that 2016 would be a rerun of 2008 (the year of the banking crisis) and added the chilling and much-repeated phrase: “In a crowded room, exit doors are small.”

In fact the year 2016 was one to celebrate, at least from many British investors’ point of view.

If you owned any fund or portfolio of shares that approximately resembled the UK’s leading FTSE 100 index of blue chips, you would have made capital gains of around 14pc, or more with dividends thrown in.

That’s approaching double the annual average total return earned by the British stock market since reliable record-keeping began in 1899.

But a trend emerged during 2016 which is likely to gather momentum and become even more pronounced during 2017. This is the highly focused nature of the gains within the wider market.

As the graph on Page 3 makes dramatically clear, a handful of stocks in just two parts of the market – oils and miners – were responsible for almost all of the FTSE’s 2016 gains. The rising oil price was one reason: the astonishing surge in the shares of BP (up by around 50pc) and Shell (up by 67pc) accounted for about 40pc of the FTSE’s gain.

The post-Brexit fall in sterling was the other factor. Giant firms with dollar earnings have become far more highly valued in sterling terms. Excluding this factor, share price growth among FTSE constituents was flattish.

There have been other periods in which the FTSE index was skewed by dramatic share prices movements in isolated sectors. The technology bubble that burst in 2000 was one example: at one stage during that period Vodafone accounted for 14pc of the FTSE. Today the biggest company, HSBC, accounts for about 8pc. The banking crisis was another example.

In such cases the entire index is dragged up or down by the dramatic outperformance or underperformance of a minority of stocks.

In 2016 this played in investors’ favour. In 2017 it may not.

Firstly, the headwinds investors face now are not confined to specific sectors.

Families are racking up nonmortgage debts at the fastest rate for more than a decade, according to Bank of England figures published on Wednesday. Couple this with inflation and, perhaps, jitters caused by a faltering housing market, and consumers will slow their spending. This is bad for many sectors.

There is also the question of dividends and company investment.

Oil stocks BP and Shell accounted for around 40pc of the FTSE 100’s gain in the year 2016