Another year of surprises

As we round out 2017, it is timely to stop and reflect on the year that was. In particular, it is always interesting to identify the year’s surprises. One benefit of writing down your thoughts and expectations throughout the year is that it becomes very easy to identify what has been surprising.

Starting with the global equity market index, the first eleven months of 2017 delivered a return of more than 20 percent. A year of big returns was not necessarily surprising given the combination of a Republican clean-sweep in the US election last year combined with low prevailing interest rates.

What has been a surprise is the unusually low variability with which these returns have been delivered. Over 2017, the returns of the global equity market have been delivered with an annualised volatility of just three percent. By comparison, the long run average volatility of the global market is closer to 14 percent. The persistency of this low variability has been surprising – particularly in the context of some significant geopolitical uncertainties relating to the United States, Russia, Saudi Arabia, the United Kingdom and North Korea.

The strength of commodity prices has also been surprising. Take copper, for example. By October, the price of copper was up by more than 30 percent since the beginning of the year. The combination of resilient Chinese demand growth and a weaker US dollar has supported the copper price to levels that most did not expect at the beginning of the year.

In Australia, the ongoing strength of the property markets in Sydney and Melbourne has been a surprise. Given the sharp acceleration in property prices in prior years, most would have expected a moderating in price appreciation in 2017. And yet prices in many suburbs have continued to charge higher.

Similarly, the strength of the Australian dollar during the year was surprising. Given Australia’s persistently low interest rates and lacklustre growth in household incomes, one could be forgiven for expecting downward pressure on the Aussie dollar. Having commenced the year at 72 US cents per Aussie dollar, it almost reached as high as 81 cents in September. This was certainly a head-scratcher for many, though common sense has since prevailed with the Aussie back down to 75 cents as we round out the year.

In the United States, many investors started the year with the expectation of genuine fiscal stimulus. This expectation was correctly centred on the analysis that a Republican-controlled White House and Congress would be able to effect meaningful tax cuts. While this looks to be playing out, 2017 remains a year full of surprises in US politics. From Russian election-meddling, to numerous federal indictments of Trump Campaign staff: this year has surely set some sort of record for the frequency of significant breaking-news stories.

The biggest surprise of 2017, of course, is the near-vertical appreciation of something called Bitcoin. While few know what a Bitcoin is, many want to buy one. At the beginning of 2017, one Bitcoin could be acquired for about US$1,000. At the time of writing, one would need at least 16 times this amount to buy a mysterious Bitcoin. It may surprise people to learn that a Bitcoin is nothing more than one of a finite number of possible solutions to an arbitrary mathematical equation. It is surprising that people are willing to pay so much money for a solution to a random maths problem. But 2017 has been one of those years.

All of this tells us that predicting the future is hard. In 2018, keep an open mind and beware the prophetic forecasts of others.

Andrew Macken is Chief Investment Officer with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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