The end of the year is often a time of reflection on what’s been and gone, and what may lie ahead. Investment commentators are no different; keen to highlight the game-changing events of the year and predict what may trouble or support markets in the year ahead. So, in place of my usual monthly market review, I’m sharing a snapshot of key lessons we can learn from 2017 and what to watch out for in 2018.
Key lesson from 2017: profits were more important than politics
Despite the headlines, profits mattered more than politics in 2017, and will continue to be an area investors should watch in 2018.
It’s understandable that many commentators flagged political issues at the forefront of the investment scene: Trump’s tweets, Macron vs Le Pen, the ever-spinning Brexit negotiations, events in the Middle East and North Korea, to name just a few.
As we know, some of these events prompted reactions in markets. One example is Spanish assets underperforming during the Catalonian independence referendum. However, these events merely prompted investors to move their money elsewhere. We saw investors head for emerging market and Japanese equities, reassured by companies in those regions showing strong profits growth, and healthy prospects ahead.
What should investors pay most attention to in 2018?
Financial markets have priced in a steady economic recovery and reasonable profits growth for companies next year. However, there are several positive and negative factors to consider:
- Profits could be supported by a sizeable tax-cutting package in the US.
- On the other hand, profits could be squeezed, for example by disruption in the Middle East leading to a sharp rise in oil prices, or developments in China affecting commodity prices.
- For some companies, especially in the tech sector, government decisions on taxation and regulation could have an effect.
2018 isn’t going to be as ‘easy’ as 2017
2017 may have seemed an eventful 12 months but there are even more complex economic, structural and political factors in play as we head into the New Year.
It looks like we’re entering a phase of more synchronised growth across regions, alongside low inflation and steady policy-making by central banks – such as the Bank of England, the US Federal Reserve and the European Central Bank. Growth is picking up speed in some areas, such as Europe, but looks to be slowing in others, such as China. This may lead investment managers to change how much they’re invested in these areas.
Headline inflation, which is a measure of total inflation within an economy, is slowly rising, although Core inflation, which tends to reflect longer-term trends in prices, perhaps less so. However, any significant rises in either would give central bankers the ammunition to be more aggressive with their interest rate policies.
Slowly falling unemployment is keeping populist pressures at bay, but governments in many countries face difficult decisions to balance conflicting demands. Meanwhile, several structural trends are becoming ever more apparent:
- high profits for a small number of tech companies
- the unstoppable rise of the digital economy – putting many old industries under pressure
- taxation, regulation and industrial policies
These varied and significant factors are all leading to a new list of winners and losers.
What does all this mean for investments?
Against this backdrop, Standard Life Investments retains a cautious medium-term outlook in our House View. While there are areas of particular value, we believe that investors should be highly selective when making decisions on how best to position their portfolios.
Within equities, we favour Europe and emerging markets and, to a lesser extent, the US and Japan. The uncertainty around Brexit means we’re less positive about UK equities.
Record low interest rates and central bank policies, such as quantitative easing (QE), have really supported bond markets in recent years. Now, with the world’s major central banks looking to raise interest rates or withdraw QE, we see limited value in most government and corporate bond markets.
Finally, we hold a neutral view on the major commercial real estate markets. In a world of moderate growth, the income this asset class offers remains attractive but there appears to be limited scope for real estate prices to rise significantly from their current levels.
After more than a summary?
As with my monthly market reviews, this blog is intended to give you a quick, accessible summary of what’s going on in markets. But if you’re keen to read more analysis, the Global Strategy team at Standard Life Investments produces a range of weekly updates and more detailed forecasts. You’ll find these in the insight section of the Standard Life Investments website.
As always, if you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding in December 2017.