12 Month Market Review – as at December 31, 2017


It is often said that avoiding politics is a way to keep peace at the dinner table. In 2017, it would have also made for a winning investment strategy. Not only were broad-based investment gains found in every corner of the globe, they were, ironically, greater in areas where political risk was most pronounced. For instance, South Korea, a country threatened by nuclear brinkmanship between the US's Trump and North Korea's Kim Jong-un, saw its stock market advance more than 40%. With synchronized global growth, and easy access to cheap money thanks to the efforts of central bankers, investors who focused on the story of strong global growth, the accelerating tech revolution and the rise of new middle-class consumers instead of political noise were handsomely rewarded.

At the start of 2017, there was still much talk about the "Trump trade." However, despite many self-congratulatory "tweets" from the President, the U.S. stock market rally was propelled not by major legislative accomplishments, but with earnings, a weak dollar and outsized returns from the tech sector. Moreover, while the S&P 500 Index's advance of 20% was headline grabbing in its own right, it was perhaps the complete lack of volatility that was the real story in 2017. The year will go down as being one of the calmest in U.S. stock market history, with the S&P 500 currently enjoying its longest run ever without a 3% correction.

Nowhere did politics fizzle as a threat more strikingly than in Europe, where many thought the swelling tide of nationalism in France, Germany and the Netherlands could threaten the European Union. Instead, as the populists faded away in key elections, the global recovery spread to Europe, and stock markets posted strong double-digit gains in all major European countries. Politics often does have the power to move markets. However, it is only one of many factors, and in the year that was, it ended up being inconsequential. In retrospect, the most prudent move in 2017, not just for portfolio returns but also for general sanity, was to ignore the noise and stay the course.


While a 20% advance in the S&P 500 index was impressive, its performance was average when compared with other stock indices around the world, and was dwarfed by the gains in Asia Pacific and emerging-market indexes. Given the momentum of the markets, it was unsurprising to see another year where growth stocks outpaced their value counterparts. The Russell 1000 Growth Index skyrocketed 28%, handily beating the corresponding Russell 1000 Value Index by 18%.


The US Federal Reserve raised short-term interest rates three times during the year for the first time in over a decade. Typically, a rising interest rate environment is not good news for previously issued bonds (as the relatively lower interest rates they offer become less attractive to investors). However, with interest rates still low in a historical context and demand for bonds, especially medium to longer term sovereign debt, remaining high, the bond market provided positive returns to investors. The US Aggregate and Global Aggregate bond indices posted healthy annual returns of 3.5% and 3.0% respectively.


One of the most common sayings in investments is that past performance is no guarantee of future results. It is a common adage for a reason. While 2017 witnessed the S&P 500's best performance since 2013, only once in the past thirty years has the S&P posted a better return in a year following an annual gain of 20% or more. While we expect global growth to continue and equities to benefit from a strong earnings outlook, we remain aware of potential headwinds. There are numerous risks that we are monitoring. Central bankers will become less accommodative as the European Central Bank scales down its asset purchases and the U.S. Federal Reserve continues to raise interest rates and sell off assets on its balance sheet. In the US, with unemployment at pre-crisis lows and the tax bill projected to increase the deficit by over $1 trillion, inflation could pick up. China continues its gradual slowdown from double-digit growth that was unsustainable in the long-term. Risks remain, and of course, if there is a collapse in bitcoin, it could have a contagion effect. While volatility remains very low and stock markets continue to move higher, both will eventually test investors' resolve. When volatility does increase, it will feel significant. It will be important to determine if this adjustment is a change in direction or simply a pause. Overall, we are constructive and believe that disciplined investors will be rewarded.