2016 – A Battle Fought On Game Of Thrones

Whilst I am not a regular watcher of the show one fund manager has described the 2016 year as an epic battle that could have been fought on Game of Thrones.  What has been demonstrated time and time again is that having the largest army doesn’t mean you’ll win the war. The rulers of various kingdoms have had to come up with some out-of-the-box strategies to make sure they emerge triumphant. 

We have seen the downfall of political dynasties (Various world leaders), old-age alliances broken (Brexit), claims of currency manipulation and corruption (Banks). Not surprisingly markets have panicked this year and investors have been left pondering whether “Winter is Coming” (Trump).

Gold has been a standout performer in 2016. Gold thrives when investors are feeling uncertain about the global economy. The price of gold bullion peaked above US$1,300 per ounce after the Brexit vote in June and has since hovered around US$1,200 per ounce.

The outlook for gold remains strong as we move into 2017 supported by a number of factors. In particular, the global economy remains weak and is in no condition to withstand higher policy rates. A December Fed rate hike could work against gold initially but over the longer term it is likely to be seen as a misstep that could increase financial stress. Uncertainty around Trump’s foreign and domestic policies is also likely to support the price of gold in 2017.

Until this year you could argue that the big four banks have ruled The Iron Throne. Recently Australia’s big four banks posted their first collective fall in cash earnings since the global financial crisis.  The major banks are struggling in the current weak economic environment with slowing revenue growth, continued downward pressure on margins and higher liquidity and capital requirements.

The banks face a number of headwinds in 2017. Net margins are declining as a result of lower rates and increased competition. Net margins have fallen from an average of 2.26% in 2010 to 2.02% in 2016. There are also fears that the Australian ‘housing bubble’ could burst which would significantly impact bank performance. Declining bank dividend payout ratios are also a significant headwind for banks.

As we move into 2017, it is likely that geopolitical and financial risks will be ongoing and valuation concerns across bonds and equities will continue. Hoping that the Mother of Dragons will descend from the heavens and save the world is wishful thinking. Just as we don’t know how Game of Thrones will end, we don’t know what’s in store for 2017 – but what’s certain is that volatility will continue to help investors play the game.

Source:VanEck Vectors.