Monthly Commentary December 2017
I’ve come to the conclusion that the only words that actually go to the tune of Jingle bells are the actual lyrics of Jingle bells. That being said this is my Christmas song for 2017.
50 billion quid,
Kim Jong Un made quite a scene, so Donald blew his lid.
Merkel, Macron, May,
Lived to fight another day,
Sterling hit the floor,
Bund yields no more,
Dax and Dow grew to new highs, despite The Donald’s lies.
Emp’rors new clothes,
Will the piece deflate?
Carney had a change of heart, and pushed up the base rate.
Europe grew once more,
But Yellen was shown the door,
One last line,
Goodwill to all men.
Get some rest, all the best, from the crew here at Kempen.
Virtually nothing beat the returns of everything.Can you believe it’s nearly over? So much happened, from Trump’s inauguration (yes, that was only 11 months ago!) and elections in France, Germany, Austria and the Netherlands (all something of a damp squib for markets), elections that didn’t happen in Italy (2018?) and an unexpected election in Spain (a small matter of a breakaway region). A year of terrorism, widespread hacking and ransomware attacks, and natural disasters all around the world. Article 50 being invoked for Brexit, a divorce bill and a rate rise. Sabre rattling between global nuclear powers, at least one of which is unstable, royal intrigue in the middle-east of Dan Brown proportions even involving Leonardo da Vinci, and a royal wedding of our own announced in the UK. The first interstellar flyby and a spectacular solar eclipse. The paradise papers and #MeToo. The Simpsons cemented their role as the best forecasters in town. And the markets just marched on through, with barely a waver.
Year to date performance, in Sterling terms
Source: Datastream, to 8/12/17
Looking at the chart above, it is difficult to reconcile with the 2016 doomsayers warning of an impending crash that would stop the bull market in its tracks. Investors who stayed their courses in 2017 did rather well therefore, benefiting from yet another stellar year of returns, making this the third best run in market history (with room for more). UK pension schemes in particular will have benefitted strongly, with their “risky” equity assets strongly outperforming their gilts based liabilities. Added to the market performance, many pension schemes have also benefitted from revisions in their mortality assumptions – simply put, life expectancies aren’t increasing as quickly as expected. The outcome of this is sharply improved funding levels.
However it’s important with a run like this to put such performance into context. Deficits are not gone, and unfortunately aren’t likely to recede in the near term through market performance alone.
Performance since 1 January 2010, in Sterling terms
Source: Datastream, to 8/12/2017
Liabilities have more than doubled in the last 5 years and whilst a few selected equity markets have outperformed, the broader asset universe (with UK pension schemes investing typically less than a third of their assets in equities) has trailed significantly. This is the context in which we must begin to view 2018 – pension schemes have survived a tumultuous period of years and sailed through the most recent 12 months recovering a good deal of their “losses” from the unprecedented collapse in yields. Looking forward therefore, schemes should be focussed on banking what gains they can, on the lookout for volatility, and be mindful of not becoming overly cautious – the costs of that could easily be as bad as being late to the LDI party (and you’ve been told that story enough times so I won’t say anything more).
Now, there were two things which did rather well this year that I thought I would sign off with, although not typically the asset classes prevalent in UK pension schemes – as it is going to be really difficult to avoid at least one of these topics up over festive breaks. And full disclosure, I wasn’t part of either. The first was a complete surprise – Salvadore Mundi, the last da Vinci, sold for 350% more than its purchase price. The second I have been watching with amusement, interest (and possibly just a little regret): from a markets perspective, 2017 will undoubtedly be the year of crypto-mania. As of the time of writing, Bitcoin has risen 1900%, easily surpassing the Tulip Craze and South Sea Bubble (and orders of magnitude more than the DotCom bubble); indeed one other budding crypto rose over 3000% in just a few hours yesterday. Or didn’t. Who knows? It might well have done and I’m probably possibly right (I’ve decided to go positively Trumpian for the last of my commentaries for this year).
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