In this age of instantaneous social media, there is an unlimited supply of stories (real and fake) that constantly stream to upset the investor.
After reading a sensationalist headline, overthinking can lead to some poor investment decision-making and I am old enough to speak from significant experience. However, right now, I feel I am in esteemed company with many revered active fund managers wrong footed by events in the latter half of 2016.
It is unfortunate that the media and Donald Trump now appear to be engaged in a war of tweeting which serves no useful purpose to the rest of us other than illustrating the irresistible media sport of Trump-baiting and the predictable paranoia that results – amusing to watch but very tiresome when it comes to contributing to investment decision-making.
It suits him to do this because if there is a scandal out there involving Russian hotel footage or anything else of a decidedly salacious matter, the more Trump discredits the entire media (and the CIA), the more he can revert to form if something should break with supposedly evidential proof.
We are all aware of the dire predictions ahead of and immediately following the Brexit referendum and the Trump election victory where professional investors were completely wrong-footed as shown by the index futures on the morning after which predicted significant falls.
This shows a dislocation between professional analysis of the implications and influence of political change and the economic reality of what will actually occur.
Having been humbled too many times by the markets over the years, I try to learn from these experiences to hopefully reduce the chances in the future. However, markets are fickle beasts and unrealised historical catastrophe scenarios have a habit of being discounted as irrelevant when they are subsequently repeated.
It is important to bear in mind where the markets have travelled over the last year. This time last year, markets had been fretting over the depth of the Chinese economic slowdown and the calamitous effect of the collapse in commodity prices in emerging markets, their debt positions and the strengthening US dollar.
None of this came to fruition and the savvy investor who decided to invest at the bottom, being 11 February 2016, and remained invested ever since has made stellar returns or as I heard it referenced the other day, ‘life-changing returns’.
For a sterling-based investor, on a total return basis, the worst performing major index has been the FTSE 100, with a total return, including dividends, of 37.5 per cent, and yes, that is the correct figure courtesy of FE Analytics.
Performance of indices over 2016
Source: FE Analytics
In sterling terms, not surprisingly, the Hang Seng index and emerging markets have returned the most at around 57 per cent each whilst the S&P 500 is up 52 per cent, the Nikkei 45 per cent and European markets 40 per cent.
Of course, there is a significant sterling effect baked in here, and if you adjust for that then the FTSE 100 has in fact delivered the best return but even so the range is from 22 per cent (Nikkei) to 35 per cent% (Hang Seng). This is a significant move by any historical standard.
As a result, there has been a marked shift in behavioural bias in the commentary and recommendation coming out of the fund management and economic community, many of whom are fully engaged in the business of gathering assets, as are we as discretionary investment managers.
One area that stands out is Europe which is currently top of the list of attractive regions for investors on valuation measures relative to other developed markets.
Fund managers from the sector are also similarly bullish regarding the earnings prospects for the region. However, the next few weeks and months sees guaranteed political turmoil ahead with topics including Greek debt negotiations, Dutch, French, German and possibly Italian elections, and of course, Brexit, all poised to dominate the headlines.
We, of course, read up and analyse the shifting sands on all these developments, as do other market participants and this presents an obvious contradictory message. Nightmarish political developments versus bullish investment outlooks.
Whilst we are all at pains to repeat that past performance is no guide to the future, this is exactly what the market is now discounting having been proved wrong twice during 2016.
Perhaps what we should really be doing is parking all the political noise and focusing on earnings rather than trying to third guess sentiment.
At the end of the day, markets revert back to fundamentals and most political leaders are relatively impotent in terms of what they can achieve as an individual outside of grandstanding rhetoric and whipping up the populist vote. If we do not foresee an economic slowdown or a recessionary outlook, then equity markets will not fall that much before valuations become an irresistible home for the excess of cash that abounds in our quantitatively eased world.
Quite where this will end is difficult to say but we are enjoying a raging bull market as the numbers above illustrate. We faced a very high wall of worry in 2016 and the resultant returns have also been proportionately high.
Many an investor has tried to predict disaster based on, as yet unseen, threats and underperformed spectacularly, convinced the markets are wrong and trapped in a positional hole where a volte-face would lead to credibility issues.
It is the easiest thing in the world to be bearish following a strong rise. It is much harder to be bullish when there is a career riding on it.
For now, there is much to ponder, whether it be news that a US carrier fleet is now routinely patrolling the South China Sea or the fact that Iran is feeling bullied by Trump, not to mention heightened tension with North Korea following its missile launches and an outwardly pro-Israel stance from the White House.
The moderate approach of the Obama administration couldn’t be more of a contrast. As investors, we have to get used to this renewed egotistical demonstration of American might and get comfortable with it or retreat to cash as a nervous wreck.
Guy Stephens is technical investment director at Rowan Dartington. All views are his own and should not be taken as investment advice.