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Rewind and Reflect



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(Photo : NN investment partners)

We are approaching the end of the year. With snow falling from the sky and Christmas around the corner, a bit of reflection over a glass of wine or while sitting next to the fireplace makes sense. And for all of us, these reflections will be different. Life walks in unpredictable ways and brings separate surprises and disappointments for each one of us.

Still, chances are that many will feel 2017 surprised positively in terms of social, economic and markets' dynamics. Signs emerged this year that populism is peaking out rather than breaking up Europe or triggering global trade wars. Economic growth reached its best state in more than a decade with the emerging world and also business investment creating a very broad-based recovery in global activity.

And markets broad yet another year of attractive returns. Especially equity markets delivered on the back of positive growth surprises and solid earnings growth. Furthermore, fixed income markets held up much better than many feared at the start of the year. Spread products brought in healthy returns as well, while government bonds still offered stability rather than negative returns that some anticipated on the back of Fed policy normalization. It did matter for investors from which “base” currency they looked at their returns though. For Euro or Japanese-based investors, the weakening of the US Dollar and rising hedging costs of USD assets made the picture less attractive than for USD investors that saw their local markets do very well and next to that received an additional source of support from appreciating currencies that lifted the value of their foreign holdings.

While reflecting on all this one might also look for lessons from it. A first and easy one, is to be cautious with your conviction on the outlook for currencies. Often currency forecasts at the start of the year are the first to fail as the new year unfolds. Last year a strong consensus emerged at the end of 2016 that the US Dollar would strengthen as the Fed would finally start to hike interest rates. That overwhelming consensus on this topic probably helped to create the opposite outcome as mentioned before, the US dollar weakened substantially in the first half of this year.

Furthermore, reflections during the upcoming holiday season will hopefully also remind us to always stay humble when thinking about the future. Around this time in the year discussing next year’s outlook and the risks around it, are very popular. Those risks we have intensively discussed in recent years, but the North-Korean conflict, QE distortions, the French election, the Italian referendum, the Trump victory, the Brexit vote, the Chinese currency devaluation, the commodity meltdown and the Russian invasion of Crimea have all been unable to derail the global recovery (so far at least). A modest, but open mind is therefore needed to assess these risks. And balance them in a mindful manner with other drivers of future behaviour of markets.

We can never predict the future, only aim to assess the probability of possible outcomes better than the crowd. And be prepared for unexpected events by aiming for robustness in our lives or our investment approach. Finally, we need to be adaptable. If the world changes, we need to adapt. The way we live, the way we work and the way we invest. This will limit damage from building further and allows for exploiting newly emerging opportunities. That is probably the best lesson to learn next to the fire or while sipping your wine, be humble and adaptable. With that in mind and the global economy marching into the New Year full of confidence, the future looks attractive even if it will continue to surprise us. And don’t forget to have fun living it!   

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