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Yearly Review

Yearly Review

2016 summary & 2017 predictions

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2016 is history. Our sights are now set on 2017 and beyond, making sure we can manage both the known and potential risks and that our clients will be rewarded sufficiently for exposure to those risks. Overall, our view is cautiously optimistic and we will explain in more detail below.

Want More Risk?

Looking back at 2016 there are number of key events that stand out. Obviously, Brexit and Trump come to mind. These were known uncertainties at the beginning of the year, which may or may not have affected an investor's view of 2016. Uncertainty is not new, it’s old, older than 2008, but it is not necessarily bad. We have to remind ourselves that we all benefit from uncertainty too. Renowned Economic philosophers Nassim Taleb and Daniel Kahneman have an interesting chat, which you can watch on You Tube about “Anti-fragility”. Nassim ingeniously reminds us that we need to adjust our expectations. For example, he says that the monetary policy of the Federal Reserves (of which he is highly critical) is trying to achieve for the economy a situation, which can be compared to trying to keep the atmosphere at a constant room temperature all year round - a very unrealistic expectation. He argues that we should be more tolerant of volatility and look for ways where we benefit from it. He says there is no word in English for the opposite of 'fragile'. Fragile things respond to volatility with downside risk (e.g. insurance companies insuring earthquakes), robust things hardly respond at all, and therefore he uses the term 'Anti-fragile' for things that benefit from downside risk. The examples he gives include entrepreneurs who appreciate volatility because it allows for opportunities to be exploited; or a tourist on a strict schedule who does not like his bus to be late (fragile), whilst an adventurer likes the unknown and unexpected (i.e. benefits from volatility). The above language may sound odd to you, but it is extremely useful to frame risk-taking and setting expectations. When we allocate money to various asset classes there are asset classes that we want to make money on when things go bad and when things are going good. The concept can be applied to many fields.

Thinking of avoiding Capital Markets?

In a recent discussion with a client, the client expressed a view that he felt the capital markets were rigged and it was impossible to make money investing in them. He felt physical property was a much better investment. I asked him a few questions:

  1. Do you have a pension?
  2. Do you think property is risk free?
  3. Why are you comparing leveraged returns of an illiquid apartment to unleveraged returns of a liquid portfolio?

Let me answer these questions. First, anyone who has a pension is invested in the capital markets whether they like it or not. The human behavioral reaction then says “well that is long-term money and that is different”, so I then ask what is different about it? Why is pension money any different to non-pension wealth? In principle, it is exactly the same, and non-pension wealth can be managed using the same long-term principles as pension money. In fact, Pioneer's investment process is very similar to that used by major pension funds. Moving on to the second question, too often the risk of physical real estate is underestimated - simply ask anyone who has ever bought a property. As I wrote previously in these bulletins, physical property is an important part of a Wealth Plan - not the entire plan. Finally, return comparison is a very dangerous game, as normally people are not comparing apples to apples. The most common of which is to compare leveraged to unleveraged returns. Clearly that is not a relevant comparison, because geared assets today can be gone tomorrow when loans are called.

Geopolitical Risk

Our biggest concerns for 2017, as in prior years, relates to the wholly unknown and unpredictable political forces. Will Trump tear up trade agreements as he promised in his campaign? If he does, how will the American trading partners react? How will currencies react?

In Europe, we face major French elections in April/May, which will have significant impact on Euro-fears. German Federal Elections in Q4 2017 will also have a major impact. Immigration, Euro weakness (Financing Greece etc.), Brexit negotiations will be major themes in this election and the markets are likely to respond with increased volatility. Will the Syrian conflict spiral into Europe? Will there be more significant terror attacks? Will the Obama last minute push for Middle East Peace lead to unwanted violent repercussions?

All of these potential factors and many more need to be factored into our planning because based on experience - by the time it is in the news, it’s too late. Referring back to my introduction above, we need to be robust and a little Anti-fragile so that we can with stand and benefit from volatility.

Brief Summary of Asset Classes Performance in 2016

Global markets overall have done pretty well in 2016, providing us all with some compensation for a flat 2015.

  • Government bonds index was flat.
  • Corporate bonds returns finished around 5% for a very long duration (very few accepted that full duration risk for the whole of 2016).
  • High yield bonds were the best returning asset class in 2016 and we were overweight this class for most of 2016, so we enjoyed this extra return and our selected funds did even better or similar to the High yield index of 17%.
  • Global equities index returns gave a total return of 7% and the S&P return around 12%, most of which was post-Trump.
  • European equities were far behind at -2% for 2016, having improved significantly from mid-year.
  • Hedge funds had an awful 2016 with most hedge funds in negative territory.

Outlook for 2017

The old saying goes that when the USA sneezes, the rest of the world catches a cold. The opposite is also true too. If the USA looks set for slightly higher growth, then we expect the world to follow. The very large debt overhang should not be forgotten and could definitely provide an occasional cold shower to growth expectations, both in the USA and in the rest of the world. So barring any Trump surprises, we expect the USA to grow reasonably well. This will provide general optimism and stability to the world and therefore our overall outlook is positive for equities. On the rates side, the picture is indeed unclear. The general view is that rates are trending up, however the pace of this is very much debatable. We therefore have left our duration exposure relatively modest compared to our benchmarks.

Israel at a glance

All sectors in Israel have had a good price growth, except pharmaceuticals. If you were invested in anything other than the Teva, Perrigo and Mylan then you made decent returns. The problem is these three giants are significant parts of the general index and therefore they dragged the index down significantly. Teva itself has retreated in price to 2012 levels after being punished by the market for expiring patents and overpaying for acquisitions. From a rates point of view, the market is actually saying that the USA government is more risky than the Israeli government, which we believe is not sustainable in the short term and will adjust. We have positioned the portfolios to take this into account.


The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this Review should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This Review does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this Review has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.

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About the Author

Mike Ellis

Mike Ellis

Director and Chief Investment Officer

Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.

Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.

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