Research Team, 13 January 2017

2016 was an interesting year for markets, with some particularly large events being noted not for the major impact they had on share prices, but rather the short lived shocks that were quickly forgotten.

One of the biggest of these major events was the Brexit in the UK. Pollsters called this incorrectly, thinking that the vote would be close but ultimately that Brits would chose to remain with the European Union. However this was not the case. Immediately following the result markets saw heavy declines, but surprisingly these were short lived and within days the losses had been recouped.

The scenario was somewhat replicated in November when the US presidential election was held. Once again commentators predicted the wrong outcome, thinking that Democratic nominee Hillary Clinton would win. However, when Republican nominee Donald Trump won, there were shockwaves in markets that were open at the time and the futures markets in the US indicated that the following day would see heavy losses. This was not to be the case, with the US market having the opposite reaction, rising instead, while elsewhere markets rebounded.

These two events along with a number of others have the potential to cause disruptions this year also. Brexit hasn’t occurred yet despite the calls for it to happen quickly, although the pound has fallen back significantly since the vote. Donald Trump is still only President-elect so hasn’t yet taken the reigns of the largest economy in the world, with his inauguration happening on January 20.

Despite the increased volatility last year, it was a good one for markets. The S&P500 in the US gained 9.5% for the year after a strong fourth quarter. The Trump Bump helped other markets as well with the Japanese Nikkei rising 16.2% in the fourth quarter to push it back into positive territory for the year. The Japanese yen weakened against the US dollar, benefiting the export heavy index and making Japanese exports more attractive.

The ASX200 had a strong final quarter of the year, benefiting from a rebound in oil and commodity prices, gaining 4.23%. For the year the index rose 6.99%. The UK’s FTSE 100 had a very strong year rising 11.6%, however, this was largely driven by the weaker pound. The NZ dollar was up 21.1% against the pound in 2016, with the majority of the weakness being seen after the Brexit vote.

The NZX50 had a less impressive gain, rising 8.8% for the year, after falling 6.5% for the fourth quarter. However, bear in mind that over the last five years the NZX50 has had a stellar performance returning 110% since the end of 2011.

Markets are starting to return to normal now after being open for two weeks. Volumes are starting to increase and we are starting to see some news flow from companies. Economically speaking there have been only a few major releases for investors to digest, however, there is plenty of action on the horizon.

US reporting season started this week, and although it is a slow start, things really start to ramp up in the next few weeks. Investors will be looking for corporate earnings to justify stretched valuations as US markets are at or near all-time highs. The Dow Jones Industrial Average is on the cusp of a major milestone of reaching 20,000. Meanwhile the Nasdaq Composite continues to push to new highs in 2017, as was the trend at the end of last year.

Central bank meetings will resume next week, with the European Central Bank the first cab off the rank. Both the Bank of Japan and the US Federal Reserve are due to meet before the end of the month while the Reserve Bank of Australia and Reserve Bank of New Zealand meet in early February.