Global stock markets closed the year on a positive note, with most at, or near, all-time highs. 2017 was a good year for investors after a bumper 2016. Having been a bit of a laggard though the year the FTSE 100 was top of the pile in December, in part because of a strong month for commodities – copper was up just over 7% and compliance with OPEC quotas continued to support the oil price, with Brent crude up again in December to $68.
The question now is whether 2018 can deliver more of the same. Markets rose last year against a backdrop of gently accelerating global economic growth, relatively benign inflation data, central banks that didn’t become overzealous about tightening monetary policy and rising corporate profits. How are these factors set to play out this year? Firstly, the economic outlook remains positive. Economic growth is positive in almost all regions, with the Eurozone perhaps the area that has surprised on the upside. The enigma that is China also appears to be showing stable growth at present. Inflation has become an issue in the UK due to the depreciation of sterling, but elsewhere in the developed world, it remains around or below central bank target levels. Interest rates have risen in the US and the UK, but in a very gentle fashion. Expect more rises in the US and perhaps in the UK, but it would be a surprise if tightening was ahead of current market expectations. Corporate profits rose last year and should do so again this year, helped by the favorable macro environment.
So, what could go wrong? Geopolitics is always a big unknown and as such, markets find it very difficult to price in. North Korea could launch a missile that hits the Japanese mainland, but the likelihood seems quite low. The Brexit talks could go very badly, but the negotiations will continue to ebb and flow over the course of the next year at least. It is difficult for markets to take a view without any hard evidence to assimilate. Equity market valuations look high relative to history, but bond yields remain low relative to history; there is a relationship between the two. Currencies could also be a major influence on market returns. The US dollar has been weak despite a tax package that should add a bit to economic growth, but it is hard to see what would reverse this. The euro, by contrast, has strengthened, partly due to the better than expected economic performance of the region. Again, there seems little to suggest that this will change any time soon. The pound has been caught in the middle but may follow its own trajectory depending on the progress of the Brexit talks. It’s too hard to call at present.
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