Synopsis of 2017
- Most major equity markets enjoyed double-digit growth during 2017; even the FTSE, while having to contend with Brexit negotiations, managed to grow by over 8% year on year.
- European general elections have all helped create a stable political platform for the EU and the Franco/German relationship looks strong. While in Asia, confirmation that Xi Jinping will remain the head of the Chinese government for the next eight years has renewed optimism over the economy.
- The Trump administration is still a work in progress as senior members continue to change and targeted policies are yet to come to fruition. That being said, the US job market and economy were strong and US equity markets offered excellent returns.
What should we be watching out for in 2018?
We remain cautiously optimistic about the returns that can be generated in 2018 but are aware the further into this economic cycle we get, the more difficult the balancing act between stimulating economies and budgetary requirements becomes for global leaders.
The returns that were seen on equities over 2017 were impressive and in order to see that sort of performance repeated again in 2018, we would need to see a sequence of new events stimulate investor enthusiasm. The backdrop we saw in 2017 was cheap money provided by central banks, low inflation, solid employment figures, low volatility and no one event able to seriously dent investor optimism.
The US Fed has already begun to reduce their balance sheet by cutting back on asset purchases and will continue this process through 2018. The European Central Bank has also announced their long-term goals of “interest rate normalization” and will start reducing their Quantitative easing purchases too. Both the FED and the ECB will be very conscious of how dependent markets have become on this stimulus and will continue to reduce at a slow and steady pace in an effort not to disrupt the improving economies.
Over 2017, inflation was weak considering the improved growth in most of the major economic regions of the world. Should we see GDP figures continue to be supportive and oil prices continue to move higher then this should start to be reflected in inflation reports.
Since the financial crisis, the purchasing power of the retail consumer has gone a long way to helping western economies recover. This volume of spending has been aided by two major factors. Firstly, the ease retail shoppers have had in obtaining low-interest borrowing and secondly the low unemployment levels. Even with the US raising rates, these two factors are likely to stay in place during 2018 but it is worth remembering that over that same time period, we have seen a large shift away from permanent jobs to contract work.
Events through 2017 have seen a steady stream of eye-catching headlines, with US President Donald Trump contributing more than his fair share. Even with this being the case, equity markets have kept calm and volatility has subsequently remained low. A good example of this was the resilience the global equity markets had during the height of last years North Korea / US nuclear standoff.
In a nutshell, the template which was in place last year looks set to remain during 2018, but not to such extremes and this is why we are cautiously optimistic.
We will be monitoring a number of scenarios to see how they develop and this could alter our outlook as the year progresses.
With Italian elections on the horizon and enthusiasm for the EU in Italy at all-time low levels, this could create problems but as we know only too well how the public end up voting does not necessarily correlate with what the opinion polls suggest. Regardless of the election, we still think the Euro will continue to strengthen especially against the Swiss Franc as the improving economic data releases from the EU add to the sense the recovery continues to develop.
In America, the long-awaited Trump Tax reforms are still to be finalised but the upside to this development has already been factored in by the markets. The same cannot be said for any deregulation that the Trump administration can bring about or the much-hyped increase in infrastructure spending. If either of these two policies can come about, then we would see a fresh boost to the US economy and equity markets.
Some of the uncertainty in the Asian markets was cleared up last year with the re-election of Xi Jinping as Chinese President. Having already had eight years with him in power, equity markets will feel that they have a good idea of what to expect over the next eight years. What is less clear is how China will balance growing their economy while adding increased regulation to the developing financial and banking sectors.
No review of the unknown in the future would be complete without looking at the UK and Brexit. Prime Minister Theresa May’s job security is very precarious, however, the one saving grace she has is that taking over the leadership of the government while Brexit negotiations are ongoing looks like political suicide and subsequently no-one wants it. In the long run, we view the UK’s equity assets and the currency as being undervalued and we see this disparity as an opportunity.
We are currently working on a number of investment themes for 2018 and beyond and we will update you in due course. In the meantime, from the team at Fern Wealth, we wish you all the best in 2018 with your finances and if you need any help or advice please feel free to contact us.