2017 looks as though it will have been another good one for equity (shares) investors. Equity markets have delivered positive returns, supported by stronger economic fundamentals. Corporate profits has seemingly trumped politics as far as investor sentiment was concerned. Recently even the political scene is showing some glimmer of improvement. Theresa May’s Brexit breakthrough heralds the next difficult phase of negotiation, but at least it is progress.
Meanwhile it looks as if Donald Trump may finally get something on the statute books in the form of his tax deal. Corporate America will be paying less in taxes next year and companies who have hoarded cash offshore can bring it back to the US and pay a reduced rate. On the economic front, we have a global economy that is firing on most cylinders without generating inflationary growth…yet. This positive confluence of conditions would suggest that equity markets can continue to make positive progress in 2018, though likely at a reduced rate.
There is never any reason for complacency, and the chance of some form of market correction remains, as always, a possibility. Despite the generally positive outlook for global economic growth, an investor must ask whether financial markets have already priced in a steady economic recovery and reasonable profits growth in 2018 into the existing equity valuations? Similarly an investor should question whether the extraordinarily low levels of volatility that equity markets have experienced in recent times, combined with the historically low interest rate environment, may be conspiring to push more and more investors up the risk curve and forcing them to take unwanted risks in pursuit of return. A result of 8 years of stock market growth is that equity valuations are significantly higher now than in the recent past. Central Banks extraordinary monetary policies have come to / are coming to an end and what impact this will have on stock markets is unknown. An unexpected rise in inflation which pushed bond yields higher could cause share prices to fall, but again, it is difficult to see where this emanates from. Wage growth remains subdued despite near full employment in many countries. Other risks to financial markets in 2018 include geo-political risks; -Brexit, Middle East tensions, and North Korea, as well as a continued upsurge in populist movements.
There are always reasons for an intelligent and informed investor to be concerned. Investing in shares provides the best return over the long term, but the investment journey is one of ups and downs, and rewards the investor who can stay the course. Investors should remember that market corrections (a fall of 10%) can happen for many reasons and are fairly frequent. Bear markets (a fall of 20%), however, tend to be associated with recession, and at present it seems difficult to see that on the horizon.
Finally, given that one of the biggest news items this year was the ongoing Brexit saga and the value of Sterling vs the Euro and the problems that this could cause for Irish exporters to UK I thought it interesting to illustrate how movements in currencies can have a sizeable impact on returns from stock markets too. From a Euro investor’s point of view it is interesting to note that 2017 returns from overseas investments have been negatively affected by the relative strength in the Euro vis a vis other currencies. The graphs below compare a number of differing indices and the returns achieved in (i) local terms and (ii) these returns when translated back into Euros.
(i) Returns in Local Terms
(ii) Returns in Euro
I hope you find this communication interesting and informative. If you have any questions or wish to discuss any aspect of your current investment/pension portfolio I would be happy to help. Wishing you and yours a Merry Christmas and a healthy and prosperous New Year.