Economic Commentary – December 2016

January 6th, 2017, by Georgina Ogilvie-Jones

The FTSE 100 ended 2016 at a record high of 7,142 having started the year at 6,242. The index provided a total return of 19% in 2016. Sector performance was very polarised by the end of the year. Brent crude prices rose 56% in US Dollar terms and 88% in Sterling terms in 2016. This greatly assisted resources sectors such as oil and gas and mining which had total returns of 60% and 106% respectively across the year, having started at a very low base. On the other hand sectors such as pharmaceuticals and tobacco had more modest gains across the year of 8.5% and 19%. These sectors feature prominently in our carefully chosen UK Equity Income fund selections and this has influenced the performance of these funds relative to the FTSE 100 in the last year.

Taking a longer view shows a different picture though and highlights the folly of overly focusing on short term data. In 2015 the oil and gas sector lost 16.5% whilst the mining sector was down 46%. So these sectors had to recoup their losses in 2016 before any gains were actually made. Additionally, the pharmaceutical sector had a total return of 5.5% and tobacco returned 18.5% in 2015, showing more stable and consistent returns. On a 2-year cumulative view this means the tobacco sector gained 41% and the pharmaceutical sector gained 14.5%. In the same time period mining stocks gained 12% and oil and gas stocks gained 33.5% and with considerable volatility over the two years. This analysis leads us to the view that we should not consider any fundamental changes in sector positioning at this time. We retain our panel of carefully selected UK Equity Income funds, which have subtle but important differences in their portfolio positioning. For instance, the Woodford Equity Income fund has 50% of its portfolio in traditional blue chip companies and 70% in companies which pay a dividend. This is set alongside around 12% in earlier stage companies; which is a differentiator from our more defensive fund choices such as Trojan Income. We remain in regular contact with all of the fund managers on our panel.

The FTSE All-World had a total return of 29.6% in Sterling terms in 2016. Our carefully selected global fund choices had solid returns. In addition to stock picking, all of the funds were assisted by currency effects due to US Dollar strength and comparatively weak Sterling.

The fourth quarter of 2017 was dominated by market reaction to the election of Donald Trump and expectations that inflation will increase in the coming year rather than any substantive or fundamental data. Politics and policy are likely to influence markets again in 2017, with Brexit negotiations due to start and important elections in the Netherlands, Germany and France.

Read the full economic commentary here…