In a year punctuated by significant elections, terrorist attacks in Europe, warmongering and natural disasters, global stock markets have proved remarkably resilient. Now that the year is coming to a close, we look back at some of the forecasts and investment tips made by our experts at the start of 2017, and assess how our pundits performed. We consider both the accurate calls and those that were particularly wide of the mark when events caught experts by surprise. Bear in mind that this review was written in the first half of November.
State of uncertainty
In our January 2017 Wealth Creation Guide, the FTSE 100 index’s end-of-year level was predicted to be 6800, according to Reuters polling, which David Prosser points out ‘would imply a completely flat year for blue-chip UK equities’. But he notes that a wide range of forecasts underpinned the headline average.
At one end of the spectrum, ETX Capital predicted that the index would end down at 6000. But as it turned out, predictions inclined towards the other end of the spectrum proved to be more accurate. Forex broker IG argued that the FTSE 100 could finish the year at 7600, and at the beginning of November, the index was above 7500.
Prosser pointed out that such broad disagreement over the outlook for UK equities reflected great uncertainty about the prospects for the UK economy. Pundits refrained from offering predictions about the impact of the government’s triggering of Article 50, which initiated formal negotiations over the departure of the UK from the EU. At the beginning of this year Prosser said: ‘It’s not even a sure thing that ministers will be able to take that initial step, given interventions from the Supreme Court and, potentially, parliament.’ (Article 50 was eventually triggered in March.)
The economic fallout from the Brexit vote was not as punishing as economists anticipated ahead of the Brexit vote in June 2016, but forecasters still expected growth to slow in 2017. At the beginning of the year the Bank of England forecast that the UK economy would expand by 1.4 per cent in 2017, compared with 2.2 per cent in 2016. In February this year it upgraded its growth forecast back to 2 per cent, but that figure was reduced in August to 1.7 per cent. Similarly, in October the International Monetary Fund said it expected the UK economy to grow by 1.7 per cent in 2017 and 1.5 per cent in 2018.
The third quarter of 2017 brought marginally better-than-expected economic growth, which, coupled with inflation, encouraged the Bank of England’s Monetary Policy Committee to raise interest rates to 0.5 per cent for the first time in a decade in November.
Tom Stevenson, investment director for personal investing at Fidelity, predicted that the pound’s fall would continue to be a double-edged sword for UK consumers. He said: ‘It makes UK goods and services more attractive in overseas markets, while UK assets look increasingly cheap to foreign buyers. But the weakness of sterling also threatens to import inflation, cutting real wage growth.’ This prediction turned out to be correct, as UK inflation climbed to 3 per cent in September – to a five-year high. Meanwhile, the cost of living squeeze has intensified, after wages have again failed to keep pace with inflation.
Stevenson also argued that two years of painful Brexit negotiations would be certain to weigh heavily on business investment and consumer confidence. Business investment has indeed been at a low level, according to Rathbones’ asset allocation strategist Ed Smith. Businesses have refrained from making meaningful investments while the cloud of Brexit hangs over UK commerce.
Gazing into his crystal ball in January, former Money Observer editor Andrew Pitts argued that in the long term the expected lack of business investment is profoundly worrying. But he added that in the short term there would be a spate of special dividends for income seekers, because companies would return capital to shareholders rather than reinvest it. ‘In recent years many large companies have “manufactured” growing dividends via financial engineering techniques, including share buybacks and borrowing,’ said Pitts in the January issue. ‘So arguably there is more scope for capital to be returned to shareholders from smaller companies that put their investment plans on hold.’
Pitts’ prediction has proved correct. UK dividends soared by 14.3 per cent year on year to £28.5 billion in the third quarter of the year, according to the latest Dividend Monitor from Capita Asset Services. Around 40 per cent of UK companies are paying their dividends in either dollars or euros, which means investors have benefited from the weakness of the pound. Special dividends also contributed to the rapid increase, as they were two-fifths higher year on year.
Commenting on the prospects for continental Europe in 2017, Andrew Bell, chief executive at Witan investment trust, argued at the beginning of the year that there would be plenty to worry investors regarding the future of the euro and the coherence of eurozone economic policies. He said: ‘People have consistently underestimated the political commitment to making the euro work, but 2017 will present some tough tests.’ As events turned out, while Europe faced politically critical elections in a number of countries, including France, Germany and Austria, the eurozone economy took these uncertainties in its stride.
This was predicted by Jeff Taylor, head of European equities at Invesco Perpetual, who said in January: ‘Many cite political risks in Europe as a major source of concern for 2017, making equity risk premiums on European equities look quite elevated historically compared with other asset classes. Yet we believe it is a big jump to assume that the rise in populism and radical politics will necessarily mean populist or radical governments.’
Indeed, Taylor was enthusiastic about the prospects for Europe, and he had been vindicated. He pointed out that continental Europe had been through years of under-consumption and underinvestment, thanks to the region’s successive crises but that ‘now it’s catch-up time’. And so it has been. Europe produced economic growth of more than 2 per cent in 2017, and it is viewed favourably by investors once again. Mark Page, manager of the Artemis European Opportunities fund, says: ‘Returns over the year to date suggest Europe is back in fashion. Those gains have been well supported by economic growth, underlined by eurozone GDP figures and by improving company fundamentals.’ The eurozone grew by 2.5 per cent year-on-year to the end of October.
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