Corentin Scavée

08 Jan 2018

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2017, a regular and quiet financial year

2017 was a normal financial year, rather quiet actually. In Easyvest's portfolios, global equities rose by 8% while sovereign bonds in the euro area remained stable. Let's come back on some key elements that shaped this financial year.

Momentum of Solace

"An object continues to move at constant velocity unless acted upon by a force", Newton declared regarding intertia in his first law of motion. This principle of inertia is not limited to physics and can also be observed in the financial markets. This is called Momentum.

Just as for a moving object in space, nothing seemed to be able to stop the market dynamics of 2016. Stocks continued their post-election rise supported by Trump's campaign promises regarding economic stimulus and tax-cuts. Meanwhile, bonds fell a little further, anticipating the tightening of the accommodating monetary policy of the European Central Bank (ECB) whose rate hike would reduce bonds prices. These trends continued for two months before foreign currency-related forces affected the trajectory of the financial markets.

Skyfall

2017 called for the end of the rise of the dollar which had been steadily appreciating against the euro since 2008. Although most analysts thought the dollar would still strengthen in 2017, it reached its highest level against the euro on Jan 4, then stabilized for two months before starting a long free fall losing up to 15%. This sharp correction was probably the result of the market's anticipation of a convergence of the European and American monetary policies.

Currency movements, especially those related to the dollar, have a significant impact on portfolios made of international stocks. The decline of the dollar, 12% in 2017, counterbalanced the good progress of the US equity markets. To illustrate this, let’s consider the S&P 500, the main stock index in the US. In 2017, it appreciated by 22% in dollar but this good performance converted in euros represents merely 7% for the European investor, ( [ (1+22%) * (1-12%) ] – 1 ) = 7%.

These exchange rate fluctuations also affect European shares that face a double problem. On the one hand, their competitiveness is weakened because the rise of the euro makes their exports more expensive for their American customers. On the other hand, the counter-value of their sales and holdings in dollar is negatively affected by the decline in the greenback.

Casino Presidential

Quickly, markets turned to a new election that had the potential to turn Europe upside down. France was preparing to elect its president and the outcome was more than uncertain. This electoral uncertainty, coupled with Donald Trump's lack of meaningful reform after 100 days, put an end to the rapid rise of markets that had gained 7% in just two months.

The failures of the moderate Socialist party under president Holland, the scandals of the Republican party, the repeated terrorist attacks and the economic plight had paved the way for extreme parties. A duel between Le Pen and Mélenchon loomed for the second round. These two notorious eurosceptics promised to shake the European Union and to bring France out of the eurozone, enough to rekindle the memories of the 2011 European debt crisis. If this threat negatively impacted stock markets, it also put an end to falling bonds, making the impending end of the ECB's monetary easing program less likely. Rates ceased to rise and bonds gradually recovered.

It was finally Macron who emerged as a winner of the first round, rushing into the central boulevard opened by the Socialist party and the Republicans. The presidential election was almost done as the probability of Le Pen being elected was very low. Despite a historic score for the National Front, Emmanuel Macron was elected president, giving a timid blip to the financial markets.

From Russia with love

This renewed optimism was quickly held back by new fears about Trump. While his reform program was on track, the threats of destitution were more than ever resurfacing. While a prosecutor made every effort to gather evidence of the connection between Trump's election campaign and Russia, the former FBI leader, sacked by Trump, was preparing to testify before Congress about Trump's pressure to drop an FBI investigation looking into Russia's interference in the presidential campaign.

The testimony was ultimately not as incriminating as expected and an American political chaos was avoided. Despite a fall of several percent, markets gradually recovered until the summer before entering a long period of bearish lethargy.

Thunderball

The summer ended without any element stimulating financial markets. They had erased all gains made at the beginning of the year. To make matter worse, a hectic hurricane season was in its infancy, further challenging markets that anticipated a significant impact on insurers’ profits and US growth. Hurricane Harvey struck Louisiana 10 years to the day since Katrina. It did not take a week for Hurricane Irma to tip its nose directly threatening Miami. Unmatched in power, Irma promised to cause damages mounting to $150 billion. The hurricane weakened at the last minute, avoided Miami, and damages were largely revised downward. If this hurricane made the buzz, its impact on the markets was limited and marked the last significant decline until November.

Although the hurricane season was behind them, stocks did not dare to rebound too strongly in September fearing the bad result of the outgoing Social Democrat government in the German legislative elections. Challenged by the extreme-right following the migrant crisis and abandoned by its coalition partner the SPD, the CDU could potentially not be part of the next government. This defeat would mean the end of Merkel's 12-year reign as chancellor, a golden age for the German economy. It also foreshadowed an unfavourable environment for cohesion within the European Union, already shaken from many sides. The score of the CDU was finally better than expected, despite a record result for the extreme-right party. Relieved, markets continued to climb at the end of September.

Doctor No-Taxes

The rebound that followed was strengthened across the Atlantic by the excellent results of the GAFA (Google, Apple, Facebook, Amazon) and a renewed optimism regarding the tax reform promised by Trump. It was taking shape, with the potential of greatly boosting the profit of US companies and encouraging multinationals to repatriate cash held abroad. The Republicans, having majority in both houses, could easily pass new laws.

But rumours about the postponement of the reform for budgetary reasons, and an election defeat in Virginia, were enough to send markets downward in early November. All doubts were finally lifted on December 2 when the US Senate narrowly voted in favour of the reform. Markets started to rise again until Christmas Eve, having accumulated 10% year-to-date.

For your eyes only

In addition to all these events that have marked the financial life, other events have marked the news without really having a significant impact on the markets. In Europe, this was the case of the referendum organized in Catalonia, which only impacted Spanish equities. In Japan, the re-election of Shizo Abe with a large plebiscite also had a moderate positive local impact on markets. Finally, in the Middle East, the end of the armed conflict with ISIS in Iraq and Syria had no discernible impact on stocks.

What to conclude?

2017 was a year of low volatility, without much crisis or surprise. With the exception of one day, equity markets remained in positive territory all year round and showed no signs of particular nervousness.

Despite this apparent serenity, this financial year did test our emotions and our investor’s cognitive biases. The rapid rise of the beginning of the year prompted many to be cautious, and the long and slow decline that followed did not encourage more to invest. Markets were sometimes too high, sometimes too gloomy. Once again, a systematic approach with a long-term vision was the best way to operate. While it is easy to determine the timing of an investment in 2017, looking in the rear mirror no timing was really bad and any investment during the first 10 months would have generated a positive return at the end of the year.

During this year, easyvest's portfolio will have finally returned 8.4% for their equity portion and 0.1% for their bond portion. As in 2017, easyvest team support you in 2018 to help you invest and remain focused in turbulent time.

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