Inside Looking ahead
Lessons to be learned from 2017
After the shocks of 2016, the relative calm of 2017 was a welcome surprise. Looking back through my columns from the year, I’m reminded, however, that every year in the markets is an unfinished story in which there is always another page to turn. There are no neat endings for investors. So what did I learn in 2017? Here’s my monthby-month guide to the year:
January brought a reminder that history rhymes more than it repeats. The FTSE 100 ended 2016 at an all-time high, the first year-end record since 1999. The UK stock market had risen 30pc since its recent low point. But the differences with the dot-com peak were more apparent than the similarities. Sentiment was anything but euphoric. The inauguration of President Trump brought hopes of a bonfire of regulation, tax reform and infrastructure spending, but investors’ optimism was tinged with realism. As expectations were tempered, real growth and a tentative return of animal spirits picked up the baton.
In February, researchers at Imperial College predicted that life expectancy for girls in South Korea would soon exceed 90. There are now 14,000 centenarians in the UK, 65pc more than a decade ago. In an uncertain world, demographics is one of the few things, like death and taxes, that we can rely on. The theme is predictable – working out how to play it in a world of increasing technological and social disruption is altogether more challenging.
The lessons in March and April were about the asymmetry of risks and the importance of weighting your investments towards what Warren Buffett calls the “fat pitch”. The early triggering of Article 50, setting the clock ticking on a still undefined Brexit, stacked the odds against investments focused on the UK’S domestic economy. By contrast, the chance of a market-friendly result in the elections in Holland, Austria and France seemed much greater than was implied by negative market sentiment in Europe at the start of the year. The MSCI Europe index stands about 25pc higher than it did 12 months ago, having significantly outperformed the UK. Sometimes the obvious trade is the right one.
May was all about technology after the Nasdaq burst through 6,000. The 20-year anniversary of Amazon’s stock market flotation was a reminder that disruptive change is a long-lived process. In two decades, a little online bookseller transformed retail and saw sales rise from $16m (£12m) to $136bn. The key investment lesson from the Amazon story, however, is the power of active investment. Amazon’s shares have delivered a compound annual return of 40pc since 1997.
In June, we were reminded that improbable things do happen. Six weeks earlier, I wrote that “failing to significantly increase the Government’s majority … is pretty much unthinkable”. Sterling rose by 2.7pc on the day Theresa May announced a snap election, the largest daily rise in nearly 50 years. The lesson to take from the June election fiasco is the importance of diversification. In the absence of a crystal ball, investors have to hope for the best but plan for the worst. A balanced portfolio will experience a bit of both in most years.
Another anniversary came along in July to deliver an important lesson about the significance of apparently unimportant events. Ten years earlier, in 2007, two things had happened that changed everything but could easily have passed unnoticed at the time. A new camera-phone with a clever touch screen was launched by Apple within a few days of a seemingly insignificant bailout of a hedge fund by an investment bank called Bear Stearns.
The technological revolution fuelled by the smartphone and the financial crisis have been the most important investment themes of the past decade. What is the equivalent trade today?
After a quiet August (the first in a while), September brought a new mood of anxiety not helped by a reckless stand-off between Kim Jong-un and Donald Trump. That was the backdrop to a note from Goldman Sachs entitled “Bear Necessities”. The bank’s conclusion was that while there were reasons to worry about the eight-year-old bull market, there was also a decent case to be made for markets holding their nerve. A period of low returns rather than a continuing bull or market correction was their base case. We did some research ourselves on sideways-moving markets and concluded that they are more frequent than you might expect – and a great environment to be an active stock-picker rather than an index-following passive investor.
In October, I raised a glass to Richard Thaler, winner of the Nobel Prize for Economics for his work on behavioural finance. His prize was well-deserved recognition for his insight that “homo economicus”, the rational agent always seeking economic advantage, does not exist in the real world. An understanding of the behavioural flaws that we have all inherited from our primitive forebears is the key to successful investing.
The year, which began with one reminder of investor folly, ended with another. February had seen Snapchat owner Snap float on a pie-in-the-sky valuation not seen since the excesses of the Nineties technology boom. November brought another example of investors losing touch with reality. This time the bubble in the making was Bitcoin, but the message was the same as with every other investment mania since swapping a house for a tulip bulb seemed a good idea.
December is not quite the end of the line for the best chairman of the Federal Reserve in many years but last week marked Janet Yellen’s last appearance in front of the media. She leaves the US economy in good shape, slowly returning to monetary normality. In an uncertain world, her steady hand on the tiller has been welcome.
Next week, I’ll turn Janus’s other face towards 2018. In the meantime, happy Christmas.