What 2017 holds for private investors

By Ian Futcher ASCI, Stockbroker, London Stone Securities

2016 has been a defining year in which we moved away from the conventional into a world of uncertainty.

At the beginning of the year, the idea of Trump presidency or Britain voting to leave the EU was unimaginable. In January, the odds of Brexit were approximately one in three and Trump becoming the republican nomination was a staggering 200 to 1 with many bookmakers. However, both the UK and the US moved away from continuity and have chosen a new path.

Pundits had stated that these political shocks would result in significant market drops and volatility across the global markets and we have seen neither. A short term drop in the markets was observed following Brexit, however we then observed a rally and nor did we see the expected drop from the post Trump victory. In fact, the FTSE 100 is up approximately 8% for the year in comparison to 2015 which showed losses of 9%; these unexpected gains demonstrate that 2016 has been ‘The Year of the Unexpected’.

“A few fundamental points must be taken into consideration when looking at the gains seen on the FTSE 100” says Ranjeet Singh, the CEO of London Stone Securities, “firstly not all stocks have seen rises as FTSE 100 gains were not comparable to the FTSE 250 which has only seen a very modest increase of approximately 0.5%”.

“This difference has resulted from the fact that this year we have seen a momentous fight-back in commodity, mining and oil stocks with some FTSE100 companies up over 500% on the year, something which nobody had predicted. As an internationally biased group of businesses, the FTSE 100 has also benefited greatly from the weak pound. Currently approximately 70% of profits seen by companies in the FTSE 100 are from abroad but profits due to weaker currencies have no real fundamental value; any rise in sterling may see the gains from private investors wiped off”.

When discussing key themes for 2017 Ranjeet mentions continued uncertainty and explains why:

“The key political events of 2016 have still yet to come into effect as the UK is still a member of the EU and Donald Trump has yet to take office. There are other key events in 2017 that may continue 2016’s theme of going against the expected – we have elections in France that may see the rise of the far right and we have elections in Germany that may see Merkel removed from power and destabilize the biggest pillar in Europe. We are also now facing the very real possibility of a Fed rate hike likely either before the end of the year or very soon after, coupled with an increased possibility in reduction of QE in Europe”.

When asked what this will means for the markets, Ranjeet’s reply is very to the point:

“Once we see Article 50 invoked, a recovering pound sterling and Trumps’ policies being implemented, investors may seek save havens which may hurt the equity markets and bring bonds finally back in from the cold. That said the FTSE 100’s is still viewed as holding safer assets than midcaps and with interest rates likely to remain low in the UK for some time to come and with a stagnating property market, equities will tend to benefit by default as investors search for a home for their cash. If that does happen, we see the FTSE 100 outperforming the FTSE 250 again.”

However, it is key to remember that if we see either a loss or a gain on the FTSE it is rarely the individual investor who wins.

According to a study conducted by financial research firm DALBAR, the average investor realised an average annual return of only 3.7% a year over the past three decades, underperforming the wider market by approximately 5.3% per annum.

In these times of continued uncertainty, it may be time to use an advisory service to guide you through the volatility.