How the markets rode political bombshells and a new era began in 2016

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2016 has been widely recognised as a tough, unpredictable year for investors worldwide. Yet political shocks have not disrupted markets as much as many expected.

The bombshell result of the Brexit vote and the election of Donald Trump as president of the United States, among other events, have kick-started a new era for investors and a gradual shift towards fiscal policy as the preferred tool to help economies grow.

Hargreaves Lansdown senior analyst Laith Khalaf says Brexit was “a scary event” for investors, to the extent that it put them off investing. Between the referendum in June and the end of October more than £7bn flew out of equity funds.

Some £3.8bn of that was from UK equity funds, according to the Investment Association.

Khalaf says: “Brexit had a polarising effect on the UK stockmarket, with some sectors doing very well, especially the internationally focused ones, while it was more difficult for domestic names.”

But experts have argued the political events of the year have had no serious impact on markets as central banks’ money printing continues to support growth.

Tilney Bestinvest managing director Jason Hollands says: “People talked of systemic collapse in the market post-Brexit or Trump, but markets were better prepared for potential shocks, pricing in scenarios with anti-establishment events.”

Property pains

However, the Brexit vote did have a knock-on effect on the commercial property market, showing the weaknesses of the sector and catching the attention of the FCA.

Property fund giants with assets of over £18bn temporary suspended dealing or applied discounts to funds to stem an exodus sparked by fears over falling property values in the wake of the vote.

Khalaf says: “The commercial property market fallout was an event on its own. All the fund closures were probably not an indication of extreme market circumstances, but getting your money out was probably not great timing.”

Despite the UK economy showing relative resilience to Brexit, the Bank of England cut interest rates to 0.25 per cent in August and restarted its quantitative easing programme, – “mistakenly” in the view of Old Mutual Global Investors chief executive Richard Buxton.

Khalaf says: “Cash in the bank is returning less; last year we thought we’d have an interest rate hike, but we had a cut instead.

“Nearly 10 years on from the financial crisis there are still measures from central banks and people think we are still on the brink of something bad.”

AJ Bell investment director Russ Mould notes the start of a shift this year from monetary pol-icy towards fiscal, adding this had begun before Brexit and the US election.

People talked of systemic post-Brexit collapse but markets were prepared

Charges come into focus

Overall, according to Hollands, investors had “a good year” mainly because of weaker sterling, a major driver of returns.

He says: “Despite all the doom and gloom, investments in sterling terms have done very well this year. For a UK investor, for example, investing in Japanese stocks got you 20 per cent returns in sterling terms this year.”

The investment industry came under pressure in November as the FCA attacked the lack of value for money offered by many active managers.

A damning 200-page report showed passive funds could achieve returns as much as 44 per cent higher than actively-managed equivalents and at a lower cost.

The study has the potential to change the industry dramatically.

Khalaf says: “There are still a lot of funds from more than 20 years ago with tens of billions that behave like trackers and charge like active. These funds were designed for retirement and were built to deviate by only a small amount from the benchmark.”

Hollands adds: “The heavy emphasis on costs is not good news for asset managers, but that has been the wrong way to look at the issue. Costs or fees are not the proper measure to consider but it’s more important to look at performance. Active managers are going to continue to be under pressure around charges.”