In a review of 2017, Hamish Preston, senior associate, index investment strategy at S&P Dow Jones Indices states that “risk was the dog that didn’t bite this year”.
Victories for the favourite candidates in Dutch, French, German and Japanese elections did not prove a repeat of the surprises seen in 2016 votes. In addition, ultra-low stock-to-stock correlations helped the S&P Europe 350 record the lowest average monthly volatility during 2017 than in any other year in the past decade.
Low volatility also engulfed US equities, with average 1-month volatility in the S&P 500 in 2017 lower than in any year since 1970. “Market participants have seemed intensely relaxed about the expected impact of anticipated news-flow on S&P 500 constituents; 47 of the lowest 56 closing VIX levels since January 1990 have been observed in 2017, as well as two new all-time closing levels,” said Preston. This environment helped the S&P 500 VIX Short Term Futures Inverse Daily Index to a 176% year-to-date total return.
Average 30-day realized volatility in the S&P 500
Source: S&P DJI.Other notable trends in 2017 included the impact of the relative strength of the pound on UK equities. Preston noted: “The weak and wobbly value of the pound that followed Prime Minister Theresa May’s surprise decision to call a general election, and the subsequent loss of her party’s majority, helped the S&P United Kingdom BMI (denominated in pounds sterling) to outperform its euro-denominated counterpart.” However, the end of the year has witnessed a turnaround following the Bank of England’s decision to raise interest rates for the first time in a decade helped lift sterling against the euro.
Looking at factor performance in 2017, Preston highlights momentum’s strong gains across many equity markets. The S&P 500 Momentum Index has risen 28.2% so far in 2017 making it the best performing S&P 500 smart beta index. Elsewhere, in India there was a 46.0% year-to-date rise in the S&P BSE Momentum Index, and in Japan there was a 24.7% rise in the S&P Momentum Japan Large MidCap Index.
Growth stocks have also performed well in the US this year, with S&P 500 Growth returning 27.2%, making it the second-best S&P 500 smart beta index. The S&P 500 Dividend Aristocrats was third with a return of 19.9%.
Looking at country equity indices, the S&P Poland BMI was the best performer among countries in the S&P Emerging BMI, with an impressive return of 30.4% so far in 2017. The next best performing emerging countries were China (29.4%), the Czech Republic (25.8%) and India (25.7%). Russian equities have been the worst performing emerging market in 2017, losing 2.0% so far this year.
Within developed markets, Austria has been the stand out performer with a whopping 38% year-to-date return, beating South Korea to a distant second by almost 11%, while the S&P 500 has returned 18.9%.
Lastly, turning to sectors, information technology has been the top performer in 2017 – the sector’s 26.4% year-to-date return is ahead of all other S&P Global BMI sectors. “An improved outlook for the global economy supported the year-to-date returns in materials (11.4%) and industrials (11.2%),” said Preston. “Energy brought up the rear by falling 8.1% and telecommunication services (-2.6%) was the only other sector to decline.”