APW Insight - A Year in Review 2016

AND THE WINNER IS? – A LOOK BACK AT THE YEAR THAT WAS

2016 may well be the year where we remember that surprises can and do happen. Among these events, we focus on a few:

  • The Brexit referendumwith Britain opting to leave the European Union (EU).
  • Donald Trump winning the Republican Presidential candidacy and then going on to win the November US Presidential election.
  • The Chicago Cubs breaking a 108 year drought to win the World Series.
  • The Western Bulldogs winning the Australian Football League after 62 years.
  • Leicester City winning the English Premier League in May 2016.
  • Cronulla Sharks Rugby League team beating Melbourne Storm to win their first ever grand final.

Aside from the sporting achievements, in which we are pleased about in keeping with the Australian underdog spirit, there is much to learn from the surprises of Brexit and a Trump Presidency. Upon reflection, these surprises show the speed at which markets react and can turn around.

The following graphs show the initial reactions of markets to both the surprise results of the Brexit vote and the US Presidential election.

Contrast the initial market reactions in each situation to the rapid market recovery once the ‘dust settles’ in the graph. 

To both these significant events, we can undoubtedly borrow the mentality of Chinese premier Zhou Enlai in 1972 in saying the impact of the French Revolution was ‘too early to say’. The ultimate market impact of both these events will take years, if not decades or longer to be truly understood.

As difficult as it is to measure the impacts of events looking backwards, the difficulty in forecasting the future is exponentially hazardous and fraught with danger. Please consider this statement carefully as next years forecasts and predictions roll off the press like confetti over the next six weeks; importantly their value of less than confetti.

JUST A TOUCH OF VOODOO

It is always entertaining to back test financial market predictions and we have included a small sample to brighten up the Festive Season.

  • Starting with a look at the best and worst predictions for the ASX200 for the 2016 calendar year, Morgan Stanley tipped a finish at 4,800 points and Credit Suisse a more bullish 6,000 points. With the index currently bouncing around 5,600, both extremes are likely to miss the mark.
  • Oil going to USD 80 (currently USD 53)
  • Gold rising to USD 2,000 (currently USD 1,375)
  • “Three Top Shares for 2016”, according to Motley Fool on 25 Dec 2015 were: shopping centre giant Westfield Corp, digital real estate business REA Group and healthcare company CSL.
  • The results for the end of November 2016 show Westfield shares down -0.66%, CSL -5.09% and REA Group -4.36% compared with a market return of +7.17%.
  • “Wealth’s Top Picks for 2016” according to The Australian on 26 December 2015 included a UK based financial services company as a possible “currency play” for 2016 suggesting it may benefit from the Australian dollar weakening against the British pound. The AUD actually rose nearly +20% against the pound, year to date, thanks in no small part to the unexpected Brexit result.

Investing based on making forecasts about individual companies is an unnecessarily risky proposition as there are so many moving parts and future events (that are by definition unexpected) to control for. arkets are forward looking, not backward looking.

OUR APPROACH – A brief reminder

A better approach in our view is to diversify as broadly as possible across stocks, sectors and countries so as to lessen the influence of any one company, sector or jurisdiction.

Diversification is an antidote to avoidable risks like holding too few securities. It can also save you from missing opportunities. Interestingly we couldn’t find any recommendations last year for Fortescue Metals Group +200% YTD, Bluescope Steel +>100% or Worley Parsons +85%.

By broadly diversifying, you’re taking the guesswork out of investing and saving yourself a whole lot of time scouring the investment pages for stock picks.

The only sure bet we will make at the end of 2016 is that we will be here in the New Year to continue assisting you to achieve your objectives.

From the team at APW Partners we wish you and your family Happy Holidays and look forward to working with you in 2017 and beyond.

 

 

Disclaimer
The information provided in this Newsletter is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on information, you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.