After a roller-coaster start - at one point in February 2016, the S&P 500 index fell by 15% - the principal equity markets in developed countries had a good year in 2016 (see Exhibit 1 below).
The year 2016 got off to a bad start in equity markets, with widespread angst over prospects for global growth and in particular the Chinese economy (adjustments in the yuan). This angst was fed in part by the continuation of the fall in oil prices (to USD 26/barrel in February) prompting a slump in valuations of equities as of January 2016.
Initial discussions between Saudi Arabia and other oil-producing countries were tentative but testified to the will to negotiate and enabled a rapid recovery in oil prices (to around USD 50), which prompted a stock market recovery in February and March.
The rally continued during April and May, albeit showing signs of a slowdown despite a fairly beneficial economic backdrop.
In June, the UK referendum was the focus of attention and drove volatility on European markets to the highest level of the year. The UK’s vote to leave the European Union, announced during the night of 23 to 24 June, was a huge shock. The major equity indices plummeted on 24 June, before recovering steadily. The rapid designation of Theresa May as prime minister clarified the political situation (though numerous questions remain as to how the forthcoming negotiations will go) and enabled a substantial rebound in equities in July followed by a degree of stabilisation.
Volatility picked up again in the autumn, with movements in oil prices, doubts over monetary policy and questions on global growth continuing to feed nervousness as equity valuations rose without much consideration of macroeconomic fundamental factors.
As of October, the imminent presidential election in the US added to this nervousness. On 2 October, Theresa May announced that Article 50 of the Lisbon treaty would be invoked before the end of March 2017.
Meanwhile in Italy, it rapidly became apparent that the prime minister would not emerge victorious from the 4 December referendum.
And then came... Donald Trump! Very quickly after the election, the assumption of a more expansionist budgetary policy, as evoked during the electoral campaign, prompted a rally in equities and the US dollar. This momentum remained intact despite precise details of the stimulus measures being lacking. For the majority of investors prior to 8 November, the election of Donald Trump was perceived as a risk for financial markets but his acceptance speech provided initial reassurance.
The rally began to flag as volumes of transactions fell going in to the year end, but equities extended their rally in December 2016. In early December, OPEC confounded its doubters and sent crude oil prices soaring by agreeing to its first production cuts in eight years. This news underpinned equity valuations in the last month of the year.
Exhibit 1: Performance of selected developed country equity markets in 2016
Source: BNP Paribas Asset Management, Bloomberg as of January 2017
The performances shown in the table above are all in local currency terms, excluding reinvested dividends. Performance for the MSCI all countries index and the MSCI emerging countries index is in US dollar terms.
Global equities gained 5.6% (MSCI AC World index in dollars) in 2016 while emerging markets equities rose by 8.6% (MSCI Emerging in dollars), despite a more difficult end to the year for emerging assets facing tension in US rates and penalised by fears of rising protectionism.
In developed markets, US stock markets performed strongly (+9.5% for the S&P 500) as they were less exposed to the consequences of Brexit and naturally benefited from the prospects of a boost to activity and deregulation following the election of Donald Trump.
In Japan and the UK, equity markets were driven higher by the depreciation of their respective currencies...
Japanese equities were supported by the yen's depreciation in November and December after a chaotic performance in the first 10 months of the year. They managed to end the year close to where they had started it (+0.4% for the Nikkei 225 index).
In Europe, the Eurostoxx 50 gained 0.7%. In early July, fears concerning Brexit and the specific situation of certain financial institutions pushed European banking stocks to their lowest level in four years. Despite a surge in Q4, the banking sector did not manage to recover all its losses. The UK FTSE gained an impressive 14.4%, but this reflected, above all, the decline in sterling against the euro (-13.9%).