"As goes January, so goes the rest of the year," goes the phrase. If this is true, investors are in for an uneventful year - an idea that seems hard to believe. January started with a murmur, with the FTSE 100 and FTSE All-Share delivering a negative, but muted, response.
The FTSE 100 was down 0.57 per cent for the month, while the FTSE All-Share lost 0.33 per cent. Other markets were similarly quiet, with the Euro Stoxx shedding 0.35 per cent and S&P gaining just 0.05 per cent in sterling. MSCI World index gained 0.90 per cent over the month.
Those movements, influenced by strong currencies, were despite some major political events, including the inauguration of US President Trump and further political wrangling over the UK's vote to leave the European Union.
The US continues to be the big topic in markets, with speculation growing over the Federal Reserve's next move and the timing of the US rate rise. The S&P 500 is teetering around a record high after reaching a new milestone in December; with data showing that the US economy added 227,000 jobs in January 2017, it could be set to move higher in February 2017.
Market lore predicts that stock and bond prices will fall after a third increase in rates by the Fed. So far the market is experiencing an exuberant upward rally in the wake of the election of President Trump and the first interest rate rise in December 2016. However, that could stall as monetary policy tightens, according to broker AJ Bell. Analysis from the broker shows that the S&P 500 has gained an average 17 per cent in the year preceding a first interest rate hike, but lost an average 0.4 per cent in the year following a third hike, with investors tempted away from equities and back into bonds with higher yields.
There is little need to panic just yet, though - the Fed is hiking rates slowly and under current chair, Janet Yellen, has taken 411 days to implement two rises compared with an average 165 days for the first three hikes over the past seven cycles.
The weaker dollar, meanwhile, has benefited from emerging market equities. MSCI Emerging Markets index ended the month up 3.2 per cent and the Investment Association (IA) Global Emerging Market fund sector returned an average 4.4 per cent, while the IA Asia Pacific ex Japan sector returned 4.6 per cent on average.
The winners and where to position now
The best-performing funds in January included three gold funds, as the precious metal benefited from investor nervousness about the months ahead. Stanhope Capital chief investment officer Jonathan Bell said: "Gold performed well in January, rising 5.1 per cent, while other commodities ended the period flat, suggesting that the strength in gold is a reflection of investor concern on the policy uncertainty that lies ahead."
One theme that appears to have slowed this month after a storming December was the rotation from quality growth into value. MSCI All Country World Index (ACWI) Value Weighted was up just 3.3 per cent over January and was beaten by several other factor indices, including MSCI ACWI Momentum - a reversal on the month before. In January, MSCI World IMI Value index also lost 0.38 per cent against a rise of 1.6 per cent for MSCI IMI Growth index. In December, value easily outperformed growth.
But Ben Yearsley, investment director at high-net-worth investment service WealthClub, says this is a short-term reversal and argues that value remains the place to be invested - particularly if the interest rate cycle gets going. He likes JO Hambro UK Dynamic (GB00BDZRJ101), Schroder Recovery (GB00BDD2F190) managed by stalwart UK value managers Nick Kirrage and Kevin Murphy, and GAM Global Diversified (GB00B66RBL40).
Meanwhile, inflation is rearing its head in both the UK and US, so it could be time to take out protection such as inflation-linked bonds before everyone piles in and it gets expensive. M&G UK Inflation Linked Corporate Bond (GB00B44JC482) is a strategic bond fund that should protect investors in a rising inflation environment. It also has a fairly short duration, meaning it is less sensitive to rises in interest rates.
Mr Yearsley says: "I think inflation will come back and it would not be a surprise to see it reach 3 per cent later in the year. The purest play is a fund like M&G UK Inflation Linked Corporate Bond Fund, but you could also invest in a slightly more esoteric way via a renewable energy investment trust, which typically receives inflation-linked payments."
He suggests Foresight Solar Fund (FSFL).
Should you trust the January barometer? Since 1984, the concept that January's market returns predict the rest of the year has been true 67 per cent of the time for the FTSE 100 index, and before January 2000 true 81 per cent of the time, according to Adrian Lowcock, investment director at Architas. But from January 2000 onwards it has only been accurate 53 per cent of the time. The January effect refers both to the idea that markets are generally positive in January and to the principle above. But both appear to be fading. "Before 2000, January was one of the best-performing months of the year returning an average of 3.1 per cent," says Mr Lowcock. "However, since 2000 the FTSE 100 has delivered an average loss of 4.67 per cent in January." Much of the January effect was due to the strong bull markets of the 1980s and 1990s. Markets generally rose both in January and for the year as a whole. However, the trend relation has deteriorated since 2000, as markets have become more volatile and less one-directional, making short-term performance a poor guide for the long term, adds Mr Lowcock. So don't hold out for a quiet 2017 just yet. |
