January 2, 2018

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

Worst dollar performance in 14 years

Despite the Fed’s and the ECB’s divergent trajectories, the dollar fell against the euro to $1.18 in December from $1.05 in January, confounding expectations. At the start of 2017, the average forecast from five banks pointed to the euro ending the year at $1.05.

The Dollar Index, a measure of the currency’s value against a basket of major peers, was poised for its worst annual performance since 2003.

In parallel to the dollar’s drop, investors rotated away from US domestic-focused companies and into American exporters. The STOXX TRU™ USA 100% index, whose components are companies that raise all of their revenue at home, climbed 13%.1 The blue-chip STOXX® USA 50 Index, which has no geographic revenue sourcing limitations and hence includes many highly capitalized multinationals, advanced 21%.

Volatility collapses

Improved financial conditions and investor bullishness were also reflected in a slump in equity volatility. The EURO STOXX 50® Volatility Index, or VSTOXX®, which tracks real-time options prices for the EURO STOXX 50, fell from 18.12 at the end of 2016 to a record low of 10.7 in October. The gauge posted its biggest annual drop in percentage terms since 2009.

Trading in derivatives tied to the VSTOXX will end 2017 with record volumes as more investors turn to the benchmark as a gauge of political and market risk in Europe.

Vintage year for smart beta funds

Passive investments that track alternative-weight indices continued their growth trajectory. Net inflows into exchange-traded funds (ETFs) and products following so-called smart beta strategies jumped 30% to $69 billion in the first 11 months of 2017 from a year earlier, according to consultancy firm ETFGI. That was the biggest increase since 2009.

The inflows reflect increasing interest in factor-based strategies, as investors actively seek to exploit risk premia through passive vehicles. Factor investing proved its virtue during the year: all six factor premia tracked by the iSTOXX Europe Factor indices – value, carry, momentum, low volatility, quality and size – outperformed the STOXX Europe 600.

Sustainability awareness continues to grow

Somehow ironically, in the year when President Trump announced the US withdrawal from the Paris Agreement on global warming, the STOXX® Global Climate Change Leaders index rose 26%.

The year that ends saw banks, private-equity firms and traditional asset managers introduce new vehicles that invest in companies ranking high in environmental, social and governance principles (ESG). Surveys showed increasing commitment to investing responsibly – from large pension funds to individual millennials.2

Thematic investing gains space

Investing along themes also continued in an upward trend both in asset prices and in inflows. The iSTOXX® FactSet Thematic indices covering Ageing Population, Healthcare Breakthrough, Digitalisation and Automation & Robotics – themes that are disrupting the world in the digital area – rose on average 31% in 2017.

Four London-listed iShares ETFs tracking the indices were launched in September 2016, and have lured a combined $1.7 billion in assets since then. The iShares Automation & Robotics UCITS ETF was Europe’s top smart-beta ETF by new assets in the first 11 months, according to ETFGI.

Featured indices

1 Figures are net total returns in local currency.

2 ‘Morgan Stanley Survey Finds Interest in Sustainable Investing Stronger than Ever,’ Morgan Stanley, Aug. 9, 2017.