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Blog Posts — December 28, 2017

2017 Review: Global Economy and Risk-Taking Steam Ahead – Part I

The post-crisis economic recovery gathered pace in 2017 as the Eurozone and Japan joined the global growth momentum, helping investors push risk assets higher. 

Expanding global trade, manufacturing and services, low inflation, and monetary policies that remain largely accommodative set the tone for stable financial conditions in the year. Further helping the positive background was a retreat in political risk, as populist parties lost elections in the Netherlands and France.

Benchmark indices in strong showing

All regional benchmarks performed well. The STOXX® Global 1800 Index was up 21% in 2017 through Dec. 11, reaching a record high and posting its best year since 2013.1 For euro-based investors, a 12% surge in the common currency ebbed the global index’s return to 8.5%.

The EURO STOXX 50® index of the largest companies in the Eurozone climbed 12%, nearing a ten-year high.2 The pan-European STOXX® Europe 600 index advanced 11%.3 It was also the best annual showing in four years for both indices.

The Eurozone grew 2.5% in the third quarter from the year-earlier period, the fastest pace since the first quarter of 2011,4 while the unemployment rate fell in October to a record low.

The STOXX® USA 900 Index climbed 20% to a record high.After months of slow progress, US President Donald Trump scored a victory as Congress approved the biggest tax overhaul in decades. The new bill slashes the corporate tax rate to 21% from 35%.

The STOXX® Japan 600 Index rose 20%6 as investors welcomed a strong victory for Prime Minister Shinzo Abe in Japan’s snap elections in October.

Teva’s struggles hurt Israel Index

It was indeed a positive year for all but one of the 23 national developed markets tracked by the STOXX Country Total Market Indices (TMI). The average gain was 23%.

The exception was the STOXX® Israel Total Market Index, which shed 2.1%. Teva Pharmaceutical Industries, the index’s largest constituent, tumbled 54% as the generic medicines maker struggles with high debt and rising competition.

Tech earnings drive rally

Technology stocks dominated returns in the year, as demand for innovative products from chips to handsets and the explosion in data traffic boosted revenue and earnings in the industry. The performance was also testament to investors’ preference for a “growth” tilt in portfolios as the bull market entered its eighth year. 

The STOXX® Global 1800 Technology index surged 39%, posting its sixth straight annual advance and beating all other 18 supersectors in the Global 1800. The index is now a whisker away from breaking the all-time high reached during the dot-com boom in the late 1990s.

Energy sector lags

At the bottom end of the ranking, the STOXX® Global 1800 Oil & Gas index rose just 0.3%. Oil prices made little headway during the year, even as major producers stood by a pledge to limit output. West Texas Intermediate crude in New York closed at $56.60 a barrel on Dec. 13, around half the $100-plus it reached in 2014.

Leaving ultra-loose monetary policy behind

In the U.S., the Fed raised the benchmark federal-funds rates three times in 2017 amid a strengthening labor market and growing consumer and business spending. The Fed indicated on Dec. 13 that three more quarter-point rate increases are expected in 2018 and two more in 2019. Also in tightening mode was the Bank of England, which in November raised interest rates for the first time in over a decade.

In Europe and Japan, however, monetary authorities stayed in supportive mode. The European Central Bank in October reduced its bond purchases in value but extended the program until at least September 2018. The Bank of Japan has maintained the short-term interest rate below zero and bought government bonds to keep 10-year yields at 0%.

Ten-year Treasury yields were at 2.35% on Dec. 14, compared with 2.44% at the end of 2016. The yield on 10-year German bunds, meanwhile, rose from 0.21% a year ago to 0.31%.

The EURO STOXX 50® Corporate Bond index was little changed in the year, but returned 2% when including coupon payments.
This article continues in a second part.

1,5 Net total returns in USD
2,3 Net total returns in EUR
4 Eurostat data, Dec. 7, 2017
6 Net total returns in JPY