Correctly predicting the outcome of June's Brexit vote and last month's US presidential election was no guarantee of stock market success in a tumultuous 2016 of whipsawing asset prices and extremes in investor sentiment. The fund managers who did manage to beat the market and their peers were, in fact, those who stuck with their stock picks through the sharp volatility.
This may provide a template for investors who face another busy political calendar in 2017, particularly in Europe, where France, Germany and the Netherlands all go to the polls. The start of the year was one of the weakest ever for global stock markets, with bearish forecasts for economic growth, commodity prices and banking sector profits souring the mood, and political events helping to keep investors cautious.
But as the year comes to a close, European stocks overall are more or less back where they started, the S&P 500 is at record highs, banking stocks in the United States, Europe and Japan have surged as bond yields rise, and talk of growth and inflation is back. Rather than tearing up the playbook when Britain unexpectedly voted to leave the European Union or political novice Donald Trump was elected US president, one top-performing fund manager used the volatility to build positions in his favoured companies.
David Walton, who manages the Marlborough European Multi-Cap Fund, which is this year's top-performing Europe ex-UK fund manager according to Trustnet, said his results had little to do with accurately predicting political outcomes. Walton's fund is up more than 34 percent over the past year, nearly twice the return of his peer group.
"It's difficult to make macro-economic predictions, but it's difficult also to know how the market will react," he said, citing the example of Italy's referendum on constitutional reform, another supposed risk event that markets quickly got over. The STOXX Europe 600 rallied after the referendum and has almost erased its losses for the year. Italian banks, the source of much stress in the run-up to the referendum, are up 29 percent in the fourth quarter so far.
According to the latest available factsheet, Walton had nearly half his fund invested in French, Swedish and Italian stocks. The Swedish printing and logistics company Elanders was the fund's top holding, followed by French reinsurer Scor and the Irish hotel chain Dalata Hotel Group.
The bets underscore the importance this year of focusing on company fundamentals rather than being swayed by binary political outcomes. A contrarian global stock-picking strategy, involving buying the least favoured stocks at any particular time, would be up 31 percent this year, making it the third best year since 1998, Citi's Robert Buckland wrote in a note to clients on Friday. One of the biggest swings was seen in the aftermath of Trump's victory, which spurred a sharp rotation away from so-called defensive, dividend-paying stocks in telecoms and healthcare sectors and into materials, energy and banks.
"The market expectation was wrong on two fronts. One - that Trump would lose and, two - that this would be very negative for the market," said Andrew Flynn, a portfolio manager at US-based William Blair who helps manage portfolios of global growth and small-cap stocks. Flynn's small-cap fund has beaten its benchmark for five of the past six years, but is lagging this year. With central banks around the world increasingly pulling back from the unconventional monetary policies put in place following the 2008 financial crisis, the focus is firmly shifting to fundamentals again as investors prepare for next year.
"Obviously we have a very busy political calendar, and they (elections) have potential to knock markets one way or the other," said Nick Nelson, UBS's European equity strategist. "But we'll be focused on the macro backdrop and the profit cycle - those will be more important."
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