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The investors who got it wrong in 2016 (so far)

29 July 2016

FE Trustnet looks back over commentary given by fund managers and investment professionals during the first half of the year and highlights the predictions for 2016 that didn’t quite go as planned.

By Lauren Mason,

Reporter, FE Trustnet

It’s well-known that nobody can predict exactly where the markets are heading. If this were the case, there would certainly be a large number of very wealthy, very smug investors piling their entire savings into seemingly contrarian bets.

But that doesn’t mean there’s no point in carrying out a thorough analysis prevailing conditions to come up with a best guess on the likely direction of travel. Indeed, fund managers often have to build their portfolios around their base case of what might happen in markets

As to be expected though, there are always going to be black swans and nasty surprises that will railroad even the most logical of theories.

This year has certainly lent itself to catching investors out, given the plummeting lows that markets reached during the first few weeks of the year and the abrupt bounce-back halfway through February. Not to mention the shock EU referendum result and the start of a recovery in the oil price, among other unexpected events.

Performance of indices in 2016

 

Source: FE Analytics

Perhaps somewhat cruelly, FE Trustnet will be taking a look at some of the predictions managers made during the first few months of 2016 that haven’t quite come to fruition (yet).

 

A ‘Brexit’ is highly unlikely

It will come as no surprise to investors that this is on the list, given the ‘leave’ result took a large proportion of the City by surprise. In fact, the FTSE 100 index moved less than was widely expected in the run-up to the referendum, showing a level of complacency in markets. Within the three months before the results were announced, the index was nothing more than choppy and was actually up by 3.48 per cent on June 23.

Performance of index from 23 May to 23 Jun 2016

 

Source: FE Analytics

There was an ongoing debate as to whether investors should side with the bookmakers or the polls and, given that the Scottish referendum was still fresh in people’s minds, many decided to opt for the former.

In April, star manager Richard Buxton said: “While the Brexit campaign hots up, and both sides release increasing numbers of hurried statistics to support their case, let’s keep our focus on life beyond the referendum. Businesses up and down the country need to ‘keep calm and carry on’. Putting investment on hold, due to uncertainty, risks fuelling a lack of confidence.”

“And if anyone is in any doubt about which way the great British public will vote on 23 June, take a look at the bookies odds, not the polls. Despite all the campaigning, the odds to remain in the EU have barely changed: 2-1 on we stay in Europe.”

At the very end of last year, FE Alpha Manager Mark Martin said that he wasn’t expecting a ‘leave’ majority vote.

“The prospect of Brexit does not appear to have weighed on sentiment so far, though there currently remain more questions than answers. In particular, there is as yet minimal insight into negotiations on the terms of UK membership, or indeed the timing of the referendum, which is currently slated for 2017 but could happen earlier,” he said.

“As we gain more clarity on these issues we may see increased market volatility; whilst Brexit is a very real possibility, it is not our central expectation.”

In February, PIMCO’s Mike Amey said: “UK polls suggest a tight vote with a very high degree of uncertainty. We assume the UK will vote to remain in the EU. However, we assign a probability of up to 40 per cent to a Brexit.”

 

Small-caps set for another strong year

Related to the aforementioned point, small-caps have continued to lag the UK blue-chip index due to uncertainty around the future of domestic-facing stocks.


Year-to-date, the FTSE Small Cap index made less than half the return of the FTSE 100, having risen 4.18 per cent.

Performance of indices in 2016

 

Source: FE Analytics

This is a stark contrast to the market area’s performance in 2015, when it returned 9.17 per cent compared to the FTSE 100’s loss of 1.32 per cent.

In an article published at the very start of the year, Unicorn’s management duo Fraser Mackersie and Simon Moon told FE Trustnet that small and mid-caps will continue to outperform their larger peers as we head through 2016.

“Smaller quoted companies are well placed to continue to outperform in the new year in what should again prove to be a stock pickers’ market,” they said.

“The outlook for larger quoted companies remains mixed with dividend cover, in many cases, approaching unsustainable levels. In particular, the pressure on commodity based stocks is likely to persist in 2016. By contrast, the outlook for smaller, more domestically-focused companies looks robust.”

And of course, let's not forget that FE Trustnet's very own Alex Paget believed that small-caps were set for a bumper 2016, opting for Fidelity UK Smaller Companies as his fund pick for the year.


Gold won’t do well in 2016

Despite being viewed as a ‘safe haven’ by many investors, the price of gold has disappointed over recent years. Since the start of 2011 to the end of 2015, the S&P GSCI Gold Spot index fell by almost 21 per cent.

Performance of index between 1 Jan 2011 and 31 Dec 2015

 

Source: FE Analytics

Many investment professionals were understandably cautious on the asset class at the start of this year, despite the fact that the yellow metal index is now up 41.46 per cent year-to-date.

Apollo’s Ryan Hughes told FE Trustnet in an article published at the start of January that the likelihood of a stronger dollar and the continuation of a China slowdown would probably act as a continued headwind for gold.

“With this backdrop, it's hard to build a strong buy case for gold for 2016,” he said.

“Gold mining equities may be slightly different, simply on the basis of valuation. Many of these companies are trading at significant discounts and it may not take much stabilisation in the gold price to see the equities have a rally, but this would only be for the brave at this time.”

 

There won’t be a rebound in emerging markets

Over the five years to the end of 2015, emerging markets suffered a torrid bout of performance to say the least.

Performance of indices between 1 Jan 2011 and 31 Dec 2015

 

Source: FE Analytics

It’s therefore unsurprising that many investors started 2016 with a negative sentiment towards the market area. In the first six weeks of the year, in fact, the MSCI Emerging Markets index was down 8.63 per cent.

Given the high levels of political uncertainty in developed markets at the moment though, many investors have turned to the sector for its attractive valuations, favourable growth prospects and to diversify their regional exposure. Year-to-date, the index is up 25.81 per cent compared to the MSCI AC World’s return of 17.74 per cent.


Ewan Thompson, manager of the Neptune Emerging Markets fund, told FE Trustnet in February that the asset class will continue to face multiple headwinds in 2016 and as such, investors shouldn’t expect their emerging market funds to rally over the medium term.”

“In our view, what remains wrong with emerging market earnings, ultimately, comes back to the US dollar,” he said.

“Inflation expectations are deteriorating and global liquidity is being withdrawn. If you chart EM’s relative performance over the years, it correlates very strongly with inflation expectations – which makes sense given commodities are a big part of emerging markets.”

“Ultimately, the backdrop for emerging market outperformance we are looking for would be better liquidity (aka a weaker dollar), a pick-up in global trade and rising inflation. Therefore, you have this dollar problem.”

To be fair to Neptune Investment Management, founder and fund manager Robin Geffen made a big move into emerging markets in April after arguing that a significant buying opportunity has opened up on the back of signs of economic stability in China.

“People had completely written off emerging markets but that’s when I think things became interesting. I think the wholesale selling is now over. None of these markets, apart from Brazil, are as bad as people believe they are,” he explained.

“There is so much cynicism, despair and concern built into equity prices in emerging markets which means I don’t think there is going to be another big puke. I think the lower for longer interest rate scenario is helpful in emerging markets too, so I think we may look back at 2016 as a year when people should have been buying emerging markets rather than selling them.”

Oil could fall to $10 per barrel

The plummet in oil and commodity prices last year was one of the major contributors to bearish sentiment and was commonly cited as a reason for markets’ lack of progress.

It’s no wonder that sentiment towards the oil price remained low at the start of 2016, given its marked downward trend over the last three years.

Performance of index over 3yrs

 

Source: FE Analytics

However, a combination of a weakening dollar, the tapering of overproduction and disruption in oil supply means that the price of oil is up 28.89 per cent year-to-date.

In February, Psigma’s Tom Becket said that there were a series of significant headwinds still on the horizon for oil and, as such, its price could drop to as low as $10 per barrel.

“Any hopes oil had for a fresh start in 2016 were short lived. Spats between Iran and Saudi Arabia diminished all hope of motherly intervention via OPEC supply cuts. Concerns over Chinese growth rained down further punches, with the raised sanctions on Iranian production sending poor oil to the canvas,” he said.

“$27 oil saw the emergence of doom-monger theorists with their $10 price targets. $10 oil is clearly too low. It would paint a disastrous picture for inflation, equities and global growth. This picture could well look like a recession if it coincided with further concerns over Chinese growth and a tightening Fed.”

“Sadly, $10 oil is possible due to the huge oversupply in the market.”

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