Looking back at the blazing performance of virtually all assets in 2017, Deutsche Bank's Jim Reid writes that there are a few things that stand out:
- Of the regular 39 assets in our sample, a very impressive 38 finished with a positive total return in USD terms and 36 did so in local currency terms.
- The S&P 500 (+21.8%) ended the year with a positive return in every month - the first time this has ever happened in the 90 years of monthly data we have and;
- Bunds were the worst performer out of the 39 assets in local currency terms. This is interesting as there is a perception that Bunds are bullet proof given the lack of supply and extreme ECB QE. However the fact that most of the curve still has a negative yield and that 2017 ended with the German economy growing at an annualised rate of over 4% nominal means that even Bunds couldn't defy valuation gravity last year.
Speaking of bunds and the ECB, a brief tangent: today officially marks the point where ECB purchases halve in size from €60bn to €30bn per month. Notably, according to DB, the PSPP program might be reduced by relatively more than the CSPP meaning that Government purchases actually drop by more than 50%.
Indeed, "one of the biggest stories of 2018 will be how Government bond yields cope with the notable reduction of support from central banks. 2017 was still a peak year for the supply/demand technicals in Govvies. DB thinks 2018 will mark the first year in around 7-8 where QE from the big-3 (Fed, ECB, BoJ) doesn't increase relative to net issuance of the same regions' bonds. So the technicals will deteriorate for the first time this decade all other things being equal."
And now back to the 2017 performance review: as we - and most others - have noted numerous times, 2017 was the least volatile year on record when one considers the all-time or multi-year lows reached on a number of measures of volatility across asset classes. Synchronised and firm global growth, inflation which has not accelerated as much as expected and has continually disappointed relative to expectations, and global central bank liquidity which during the year was more or less at peak levels all help explain this. For markets, this has resulted in a bit of a perfect environment for positive returns across almost all asset classes.
Indeed of Deutsche Bank's 39 asset sample, amazingly 38 finished with a positive total return in USD terms and 36 did so in local currency terms.
The big story has been the relentless rally for equity markets. The S&P 500 (+21.8%) ended the year with a positive return in every month - the first time that has ever happened - while also extending its all-time record high.
The Hang Seng (+40.8% USD terms) also reached an all-time high and tops the list for local currency performance but is pipped in USD terms by the Greek Athex (+44.8% - USD) which takes the top spot following years of sub-par returns. EM Equities (+37.5%), the Portugal General (+34.5%) and FTSE MIB (+33.4%) round out the top five. Four of the next five places are also occupied by equity markets however and include the DAX (+28.4%), European Banks (+27.8%), IBEX (+27.0%) and Stoxx 600 (+27.0%). It’s worth noting that European Banks are now up over +75% from their 2016 lows. For bonds, USD returns were solid, especially for Gilts (+11.7%) and EU Sovereigns (+14.2%). However the stronger Euro (+14.1%) during the year does mean that returns are closer to flat in local currency terms.
For completeness, Treasuries returned +2.5%. Those moves for rates/fx translate into a fairly strong year for credit in USD terms. In Europe returns were +16.1% (EU Fin Sen) to +23.3% (EU Fin Sub) while US returns were +4.6% (US Fin Sen) to +9.1% (US Fin Sub).
Finally for commodity markets, Copper (+31.7%) was the big outperformer, while Gold (+13.1%) and WTI (+12.5%) prices also rose. Only Corn (-0.4%) failed to finish with a positive total return.
Here is the full breakdown of 2017 asset returns...
... and for reference, here is just the last month of the year.