Top of the Pops: What will be the market’s Christmas No.1?

Just when you thought risky assets could not go any higher or quantitative easing any better, welcome to 2017: the year of the relief rally. The year when asset returns made the TMT bubble of 2000 lore palatable if not possible. Among the cornucopia of rising risk assets, which one will end the year on top?

We might have the tried and true US Equities. A bit like Mariah Carey’s “All I Want for Christmas Is You”, this one’s an easy crowd pleaser. While maintaining historically high margins of nearly 10%, US S&P 500 earnings have grown 10.4% through Q3 2017[1] and are expected to grow slightly higher in 2018 with the majority of earnings growth coming from the IT sector.

Or alternatively, the Christmas number one could go to an asset class coming in from the shadows, like EM equities: a bit like the comeback of Wham’s “Last Christmas”, one of this year’s favourites in homage to George Michael. The last calendar year MSCI EM equities topped the asset class charts was 2009.

Normally the winner of X Factor does well on the Christmas list. This year’s contender is Rak-Su and give it to me or “Demelo”. The market wanted inflation and a strong USD in 2017 but got neither of them in spades. Not surprisingly, with negative real rates, cash is a strong contender for worst asset class of 2017. Holding onto cash in most major currencies would have lost you money in real terms. The Zero Lower Bound (ZLB) turned out to not be a lower bound after all with negative short-term nominal rates in Japan, Europe, Sweden, Switzerland and Denmark during 2017.

The odds on favourite for this year’s Christmas number one is Ed Sheeran’s remix with Beyoncé of “Perfect”. And our Christmas chart wouldn’t be complete without the perfect asset class stocking stuffer, the bitcoin. According to COINBT:SS the lead crypto currency is up 1,575% year-to-date.

Stormzy’s “Blinded by Your Grace” might apply to the impact of currency if you valued your assets in US dollar rather than sterling in 2017.  Based on the negative sentiment in the options market, the historic trade deficit and/or stubborn fiscal deficit the GBP lost nearly 10% against the USD. Despite a formal end to QE and the first serious Federal Reserve rate rises since 2006, the USD surprised the market and lost nearly 10% of its value over the year. [2] So to hedge or not currency hedge became a serious question again for investors.

Jason Lejonvarn – Investment strategist, Mellon Capital

[1] Bloomberg, as at 30 September 2017

[2] Bloomberg YTD as at 13 December

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