2016 has been the year of key event risks shaking the global financial markets. Firstly, in a bad first six weeks of the year, a huge sell-off in oil saw prices plunge to $26 a barrel. The next risk factor was the Brexit vote, although the market fallout only lasted a few days. Then, the key focus was the US election, but again the markets held strong after an early wobble. Finally, there was the constitutional referendum in Italy on December 4th
, but that vote didn’t even register a blip in the global markets.
“There have been two major themes this year: lots of political events and an exceptional amount of resilience in the markets,” explains Chhad Aul, VP, Portfolio Manager with Sun Life Global Investments
. “That speaks to the exceptionally low interest rate environment and the current level of central bank liquidity; it also gives the indication that this market could have further to run.”
Although most losses in the equity markets were short lived and reactions weren’t as volatile as expected, many investors have felt the need to tweak their portfolios throughout 2016. “Going into the US election vote, we were seeing weakness in markets and added to our US equity position, which worked out well,” Aul says. “The flipside is that fixed income side markets have been impacted and bond markets across the world have experienced fairly significant losses over a short period of time. That spike in bond yields has a lot to do with inflation expectation running higher based on assumptions of what policies may be enacted.”
The expected normalization of the yield curve has benefitted the US financial sector and the banks in particular, who have found it difficult to earn in the low interest rate environment. As a result, many investors are flocking to US financials.
The news surrounding OPEC over the past few weeks, and what a cut in production might mean for energy markets, has also piqued the interest of investors. Aul has maintained an overweight position in the energy sector.
“Over the next few months, I expect oil prices to keep rising and there are a couple of things that can make that happen: momentum and sentiment,” Aul says. “Going into next year, it will be interesting to see how many of the various member states comply with those production cut agreements because in the past compliance has been a big problem. That will be a risk for oil as we get into the middle point of next year.”
“Against this backdrop, the fundamentals continue to be increased growth and demand and a continuing balance of supply. There will be some opportunities to play the oil market over the next year.”
One thing is for sure: no one can be certain what 2017 holds for the markets. After a tumultuous 2016, even the most conservative forecasts could be proven wrong. For advisors, Aul believes that the current market environment could cause reason to shift strategy. “There has been a huge movement to passively managed strategies in recent times, but because we’re entering a period with many different themes and diversions in the market, I think that active management could add value,” he says. “Trying to find the right active manager is a key piece. It’s not just about securities selection from the bottom up. Tactically managing your asset allocation from the top down is going to be a key factor because geopolitical and macroeconomic risks could have real impacts across the asset landscape.”