Lessons from 2016

Having reviewed events and performance of markets over the year, we have found a few lessons worth considering for 2017:

  • If Leicester City Football Club can win the English Premier League, then anything can happen. With odds of Leicester winning at 4,000–1 at the start of the 2015–16 season, this was clearly the biggest shock of the year. Maybe we should have seen this as a sign of things to come.
  • Opinion polls are often wrong. Heavy reliance on betting markets and opinion polls has been proven to be the wrong strategy this year when it comes to investing around event risk. A healthy dose of scepticism and sensible hedges are required.
  • Macro forecasts are often wrong too. Brexit has so far turned out to be nowhere near as bad as expected. Most forecasters (including us) have had to revise up estimates for growth. Such large errors are rare, but then again, so are such events. Humble pies all round.
  • Global politics is shifting, and the establishment is in trouble. A wave of anti-globalisation sentiment is spreading, as did anti-austerity in previous years. The liberal political elite is in trouble and without change or faster economic growth, more radical policy may be pursued.
  • The power of central banks is diminishing. Monetary policy is running out of road and negative interest rate policy has serious unintended consequences. Both Japan and Europe utilised this policy more this year, only to find that their respective currencies appreciated, while they hurt the profitability of their banks. Could we see a renaissance of fiscal activism? Perhaps under Trump, but probably not under Merkel.
  • Structural change is needed, and rewarded. Reform, even the prospect of it, still has the power to drive markets despite repeated disappointments. We saw this in Brazil this year, and briefly in India following the passage of the Goods and Services Tax bill before the uncertainty created by demonetisation.
  • Emerging market reliance on external liquidity has not gone away, and will probably provide some testing times in 2017 for investors. Higher US yields will pile pressure on some emerging market economies.
  • Growth remains the key priority for China, despite lip service given to reforms. The authorities remain confident and will not be rushed on this front. This could make trade negotiations interesting.


The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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