Five terrible investments of 2016 that could come back in 2017
Published: Jan 4, 2017 3:07 a.m. ET
What was last shall be first — that’s the contrarian’s motto
In any market, there are always some assets that are cheap because they are — well — just rubbish.
Economies that are in deep trouble, companies that are being abandoned by their customers, and commodities for which the demand curve has shifted so far it is no longer on the graph. But sometimes the worst-performing assets in one year can come storming back the following one — because they are spectacularly undervalued.
So which of the dogs of 2016 could stage a recovery in 2017?
In fact, there are five that look ripe for a recovery. Such as? The British pound, Chinese equities, commodities such as wheat and cocoa, airlines and gold all look as if they could stage a recovery in the 12 months ahead. At the same time, Russian equities look overvalued — and so increasingly do the American markets.
To anyone who believes in contrarian investing, scouring the year-end league tables of the best and worst performing assets has always been a useful way of figuring out where to put their money to work. Some may be bargains, and some may not be — but at least you know that you are not buying at the top of the market, and that is usually a good start for any investment.
Not all of them are worth backing, of course. The Egyptian stock market had a terrible 2016, down 27%. And guess what? Plagued by political turmoil, with a barely functioning economy, and beset by military challenges, it is likely to have a terrible 2017 as well. Likewise, the Italian market is not about to recover — that won’t happen until it leaves the euro.
But here are five assets that could turn around in the year ahead, and potentially dramatically so.
Firstly, the British pound GBPUSD, +0.6783% , the worst-performing major currency of 2016. Everyone is worried about what will happen once the U.K. triggers the process of leaving the European Union, and the potential impact on its economy.
But so far Britain has surprised everyone on the upside, with surging retail sales, and decent growth. In a world of generally low tariffs, we are about to discover that Brussels does not make much difference to a major economy such as the U.K. one way or the other. With the euro EURUSD, +0.8169% in turmoil, facing a slow-motion banking crisis in Italy, and populist political revolts in France and the Netherlands, sterling should make a solid recovery in the year ahead.
Next, gold GCG7, +0.23% , which had a flat 2016 and which is still near the bottom of a five-year bear market. Lots of people thought that printing money and near-zero interest rates would be great for gold. But paradoxically quantitative easing created deflation, not inflation.
From this year, however, governments look set on fiscal expansion, and central banks are steadily winding down QE. The result? The price of gold may finally start to move upward again. Add in some trade wars launched by the new president of the United States, and gold could start to rocket upward once again.
Thirdly, Shanghai. China’s benchmark equities index SHCOMP, +0.73% was the fifth worst performer in the world in 2016, down there with Egyptian and Nigerian markets. True, there is plenty to be worried about in China, from a slowdown in growth to an overheated financial system to the threat of tariffs from the United States. Any of those could trigger a collapse.
That said, every developing economy faces bumps on the road. China is by a wide margin the fastest growing major economy in the world, and can still triple its output before it catches up with the U.S., Europe, or Japan. Only a fraction of that is captured in the stock market. If everyone calms down, it could start to soar again.
Fourthly, take a look wheat WH7, +2.77% and cocoa CCH7, +2.86% . Strong harvests have meant that major agricultural commodities have had their worst performance in a decade. Cocoa is down by more than 30% and wheat by 13%. But food prices are always cyclical. Weather patterns change, and so do trade flows, and the costs of transportation. After all, it is not as if people aren’t eating chocolate cake anymore.
In most markets, there is a reversion to the mean if you simply wait for a while — and this could well be the year when those two commodities get back on track.
Finally, airlines JETS, +1.65% On Britain’s FTSE-100 index, the budget airline easyJetEZJ, +1.97% and International Consolidated Airlines Group IAG, +0.90% , which owns both British Airways and Iberia, were both in the bottom 10 performers last year. Rising oil prices and Brexit hit both hard. But leaving the EU won’t make the U.K. any less of a travel hub — in fact, with sterling so much cheaper lots of people will finally get around to visiting London.
Meanwhile, the rapid fall in the cost of solar energy will eventually push the oil price back down. The airline industry can rebound sharply from very low ebb.
At the same time, some of the best-performing assets of 2016 look way overpriced.
Such as? The star government bonds in the world last year were Venezuelan. In the unlikely event that you own any, then get out while you can.
The Russian stock market was up by 50% over 2016, thanks largely to the recovery in the oil price. But Russia remains what it has been for the last decade: an unreformed, statist oligarchy, led by an aggressive autocrat, with zero interest in opening up the economy, and that means it is heading for another crash sooner or later.
The American equities markets DJIA, +0.30% saw a big, and surprising, jump on Trump’s election, but as reality starts to bite, and interest rates go up, will struggle to maintain that momentum.
Many of the worst assets of 2016 will be just as dismal in the next 12 months. They were cheap for a reason. But a few will stage strong recoveries — and those five assets are the ones to watch most closely.
Source : http://www.marketwatch.com/story/five-terrible-investments-of-2016-that-could-come-back-in-2017-2017-01-04
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