The past year has been a ‘Goldilocks’ one for investors with indices such as the S&P 500 and FTSE 100 breaching new highs but Seven Investment Management (7IM) has highlighted some interesting stories away from the large-cap space.

Economic growth over 2017 has been neither too hot nor too cold, leading to a continuation of stimulative monetary policy from the world’s central banks and strong stock market growth.

According to 7IM, the S&P 500 has closed a record high 57 times this year – representing around 25 per cent of trading days. The bulk of this growth came from the technology sector, which accounts for around 23 per cent of the S&P 500’s average weighting.

Performance of index and sector over 2017 in US dollars

Source: FE Analytics

Meanwhile, the FTSE 100 has had a record-breaking year despite the uncertainty surrounding the Brexit process and muted economic growth. The FTSE 100 has hit a new record close on 8 per cent of trading days over the year-to-date, or some 20 times, supported by the index’s strong overseas exposure.

Justin Urquhart Stewart, co-founder and head of corporate development at 7IM, said: “The ‘not too hot and not too cold’ global economic backdrop has been a perfect Goldilocks environment for stock markets, and politics just didn’t matter. Goldilocks has moved from breaking chairs over porridge, to outright wild partying, breaking record after record.

“This year’s stock market exuberance is all the more reason to have a balanced portfolio. Without wanting to call the top of the market, there will always come the part when Goldilocks screams for ‘help’ and runs out of the room. That’s where multi-asset investing can be key, because it spreads risk not just across different stock markets, but asset classes too.”

However, the key themes of 2017 have not been limited to US and UK large caps. In the following article, three 7IM strategists and investment managers highlight some of the other issues that have caught their eyes this year.

Bitcoin

One of the biggest stories in the financial press this year has been the surge in Bitcoin, as cryptocurrencies seem to be on the brink of moving into the mainstream. Whether cryptocurrencies is ultimately a genuine asset or a new version of the 'tulip bubble' remains to be seen, but it’s undeniable that Bitcoin has had a strong year.

Bitcoin crossed the $12,000 mark earlier this week, reflecting a rally of close to 1,200 per cent rally between the start of the year and 6 December 2017. However, this has come with high levels of volatility – the cryptocurrency has seen days where it plummeted 20 per cent only to rally by a similar amount by the end of the session.

Ben Kumar, investment manager at 7IM, said: “The rise of Bitcoin has been about taking back control at a time when governments are probably less trusted than ever. People design their newsfeed and TV viewing online – money was just one of the next things on the list.

Value of 1 Bitcoin in US dollars over 5yrs

Source: Markets Insider

“But is it pure hype, or is there some substance? Whilst we’re steering clear, most likely, it is both. Look at who bitcoin was created by – some reclusive coding genius with a specific world view. For many people that is enough to dismiss it as a nerdy niche to be ignored. Yet reclusive coding geniuses have in recent years built some of the most successful companies in the world.

“But with futures on Bitcoin to be launched later this month, the question is will that be the death knell, or another leg upwards, once hedge funds/pension funds get involved? The jury is out, but hedge funds/pension fund involvement won’t necessarily chime with those who were attracted to Bitcoin in the first place.”

Low volatility

While cryptocurrencies have given investors a volatile ride this year, this hasn’t been the story for the rest of the market. The VIX index, which is commonly referred to as Wall Street’s fear gauge, is sitting at close to historic lows.

7IM chief strategist Alex Scott pointed out that 2017 is turning out to be the least volatile year for the S&P 500 on record. FE Analytics shows that the index’s annualised volatility stands at just 4.06 per cent year-to-date, compared with 10.27 per cent in 2016 and 13.66 per cent in 2015.

“There’s no telling where markets might take us, but few fund managers have experienced such a prolonged period of low volatility that we see today,” Scott said.

“Since the 1950s we’ve seen an average of around 40 days a year where the market rose or fell more than 1 per cent – almost once a week. In contrast, we have seen only eight days this year where the US stock market moved by 1 per cent or more, in either direction.

“Whilst there’s every chance this low volatility could persist for a good while yet, a sudden squall of volatility would remind investors that today’s dead calm is highly unusual, potentially raising uncomfortable questions about valuation in more expensive areas.”

Emerging markets

While the US and UK markets have hit new record highs this year, emerging markets have also had a strong run as investors returned to the previously unloved asset class.

The MSCI Emerging Markets index has posted a 21.36 per cent total return in 2017 (in sterling terms), compared with a 11.35 per cent rise in the MSCI AC World.

However, like the US, much of this growth has come from the technology sector. 7IM said more than one-quarter of the MSCI Emerging Markets index’s return this year has come from the IT sector.

Performance of indices over 2017

Source: FE Analytics

Damian Barry, senior investment manager at 7IM, said: “2017 has been the year when most assets classes delivered positive returns – one of the best places to have been invested was in FAANG [Facebook, Amazon, Apple, Netflix & Google] stocks or their Asian equivalents. It’s the year when Buffet’s ‘be fearful when others are greedy’ rang in many of our ears, but with the conflicting chime that the market momentum trend was still your friend.

“For us, 2017 has been a year of caution but also contrarian conviction. For example, on the multi-manager side we added exposure to some overlooked areas such as frontiers, which we think look better value than emerging markets.

“And in a year when active managers came under sustained scrutiny, we have increased our active allocation in our multi-manager funds. When markets are on a relentless upwards trajectory, the time for good specialist managers who can hunt for value is more important than ever.”