US equity markets posted positive returns in 2016, with the S&P 500 index registering a total return of 12% in US dollar terms, making the US the best performing equity region globally. While such an outcome is pleasing to investors, it does mask that 2016 was a volatile and challenging year for active managers. It is also worth noting that most of the outperformance was generated during the post-presidential election period.
2017 will be favourable for active managers based on the expectation of greater volatility
Uncertainty around the economy and presidential election in the first half of 2016 saw defensive and higher yielding areas of the market such as utilities, telecoms, consumer staples and REITs leading the overall market. For example, the telecoms sector delivered a staggering return of over 32% during that period while more cyclical areas, namely financials, were in negative territory as expectations for a Federal Reserve rate hike were lowered considerably. This negative sentiment triggered a sharp sell-off in what are perceived as traditional growth areas such as technology but also of the overall asset class.
US economic data and sentiment improved in the second half of the year driving stocks and indexes higher to record highs, particularly after the election of Donald Trump. From the election to the end of December 2016, nine out of eleven equity sectors within the S&P 500 traded higher, with value cyclical stocks being the largest beneficiaries as Trump’s policies were interpreted by many as a shift from monetary policy to fiscal policy.
Financials: Best Performing Sector
Financials, especially banks, were the best performing sector driven by optimism surrounding the regulatory environment, expectations of higher interest rates and cuts to corporation tax. Other notable winners included energy, industrials and materials stocks as investors noted the potential positive impact of infrastructure spending and faster economic growth. This trend has continued thus far in 2017.
From an investment style perspective, value-oriented investing outperformed growth in 2016, regardless of company size, although a large portion of those gains were made in the last two months. Large-cap growth managers underperformed their value counterparts by nearly 10% as measured by the Russell 1000 Growth and Value indices.
In terms of market capitalisation, small cap stocks were the standout overall last year, again posting most of their gains since the Election Day. This is not surprising as smaller companies are viewed as an area that will benefit the most under the new administration. As a result, most of the inflows we have seen since the market rebounded were poured into smaller companies funds.
2017 is looking like it will provide a positive environment for equities and one that will be favourable for active managers based on the expectation of greater volatility and dispersion of returns between individual stocks. It is also highly likely to extend the bull market that the US equities have thus far enjoyed for seven years.
A version of this article appeared in International Adviser magazine
