Which asset classes performed best in 2016?
19 Dec 16
2016 has been a remarkable year. The two best performing large equity markets this year are countries that have been mired in recession for years. At the same time, the stock market of the world’s fastest growing large economy has been delivering some of the lowest returns.
US high-yield bond prices dropped sharply at the start of the year on the back of falling oil prices and recession fears. But the asset class has recovered strongly since, even outperforming US equities in the process.
Investors’ attitudes towards the asset class have been ambiguous for a long time, which is reflected in Expert Investor asset allocation sentiment: the bulk of Europe’s fund buyers have been planning to keep their allocation to high-yield bonds stable for the entire year.
One the one hand, the ongoing hunt for yield combined with the relatively robust fundamentals of the US economy were seen as positives for the asset class, while the weakness in oil prices was considered a negative. Oil & gas companies make up about 20% of the US high-yield universe.
As 2016 played out, the modest recovery of the oil price, accelerating US growth and an only modest rise of the default rate meant returns have been good. Donald Trump’s election provided another windfall for high-yield investors, as they saw a former issuer (Trump financed the construction of many of his casinos with junk bonds, on which he defaulted several times) rise to the highest elected office.
However, the downside of all this is that US high-yield bond spreads have now come down to their lowest levels in more than two years, as Treasury yields have risen at the same time high-yield bond yields have come down.
Tags: Donald Trump | High Yield | Russia | US
