Interest rate cuts at the beginning of the year
The significant and rapid fall in oil prices and raw materials during 2015 meant a deflationary shock in the global economy. It negatively affected the propensity to invest and severely
impacted, in particular, growth markets and cyclical companies. Growth slowed and corporate profits fell, which contributed to a negative trend in global equity markets at the beginning of 2016.
This development led several central banks to respond strongly with significant interest rate cuts. Moreover, the Chinese government unveiled a comprehensive growth-stimulus programs, which included measures to promote credit demand, increased investment and structural reforms.
Equity markets climbed upwards
Global growth stabilized; the various measures taken during the summer gave a positive effect with rising commodity prices and better growth development in the Chinese economy. An unexpected "yes" to Brexit, the UK referendum in June, led bond yields to fall to new lows. The exceptionally low interest rates and a gradual increase in the growth rate led equity markets to go higher despite the increased uncertainty that emerged around European cooperation.
Shares increased during the sector rotation
After a relatively weak first half of the year for global equity markets (MSCI AC), equities increased in the second half of the year - benefited by very low bond yields and increased growth. MSCI AC, measured in USD, returned approximately 9 percent during the year. The sector rotation was extensive. Banks, energy, raw materials and pharmaceutical companies together with industrial companies performed well, while defensive and interest sensitive sectors were relatively weak.
Cautious optimism at the end of the year
During the last quarter of 2016, real growth strengthened further while inflation and inflationary expectations increased. A cautious optimism about a possible increase in investment willingness during 2017, and consequently improved prospects for higher real and nominal growth, resulted in a continued upturn in equity markets. Bond yields also increased.
The outcome of the US presidential election was a surprise. It is still difficult to convert election results to economic assessments. Tax cuts and investments in infrastructure in isolation can be expected to boost growth in the United States with effect mainly from 2018 and onwards. Increased protectionism and restrictions on immigration runs the risk of leading to increased uncertainty and slower growth in emerging markets and eventually also in the US and globally.
Volatile bond rates
During the weak start to the year, bond rates fell and all major bond markets showed sharp falls in interest rates in connection with Brexit, which contributed to the good performance of the equity markets. During the fourth quarter, long-term bond rates increased sharply with gains of between 0.5 and 1.0 percentage points. The increase was driven by higher real growth, rising inflation and inflationary expectations.
The Swedish krona weakened
Currency movements were substantial during the year. The Swedish krona weakened significantly against most currencies, including the euro.