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16th January 2018
Market Commentary January 2018

market comm web jan18
Rather than our traditional market commentary, we decided that this quarter, we would pose a range of questions to our Chief Investment Officer Vince Hopkins.

2017 finished well for world markets. How do you view the prospects for 2018?

The last few years have seen many global commentators unsuccessfully calling the top of this bull market. Worryingly, perhaps, we are entering 2018 with renewed optimism, fuelled by the prospects for global growth. The major markets of the US, Europe and Japan are all posting improved growth figures; however, the one major economy seeing continual downgrades is the UK.

Equity valuations – particularly in the US – are often highlighted as being stretched; however, the recent tax cuts will further enhance the earning growth potential which could in turn fuel either further share buybacks or dividend increases. Europe is recovering from a much lower valuation point, so further appreciation can be expected; and Japan is hitting new highs as the financial stimulus brings further economic benefits.

How do you view the coming year for the UK?

It is disappointing to say that we start the year on the same cautious note as in 2017. From leading growth expectations amongst the G8 only two years ago, we have slipped towards the bottom of the G20 league table. This outlook is no doubt impacted by Brexit uncertainties; and we cannot ignore the delicate political situation that the Conservatives find themselves in following the disappointing June election result. The left-wing policies of nationalisation, increased spending and higher taxes send a shudder through those who can remember the 1970s. If you are 40 or under, you will only have learnt about such things in history. This, coupled with the disenfranchised “youth”, offers Corbyn growing support.

The UK market ended the year with quite a strong December rally; but from here, we favour overseas markets and UK companies with large overseas earnings.

Has currency played a part in investor returns in 2017?

Sterling was resilient in 2017, especially relative to a weak dollar. £ vs: $ appreciation is nearly 10% over the year which will reduce the returns from dollar-based investments.

With the current cable rate (GBP/USD) at 1.35, many forecast that this will fall below 1.30 or worse if there is more political turbulence. The pound also rallied from August lows against the euro when there was talk of possible parity. The rate did fall to 1.08 but has rebounded above 1.12, helped by the increase in UK base rates in October. The Euro is +4% over the year.

Commentators are always looking for causes of concern – which would you highlight as being your main economic worry?

One concern is the possible threat of US inflation growing more rapidly than expected, and then countered by the Federal Reserve taking interest rate action to control it. The US market is focused on a further three interest rate increases in 2018. If more were required, then this would affect bond and equity markets globally. There are undoubtedly inflationary pressures with continuing growth and high employment, and this might stimulate further wage inflation. Oil, too, has just hit a two-and-a-half year high which will add to costs; but this is also good news for both institutional and private investors as it secures the very significant dividend pay-outs from the oil majors. Looking at the UK, the threat of an anti-capitalist government will have immediate and significant consequences.

Technology was a major theme in 2017 – do you see this continuing?

The simple answer is yes. The five FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have contributed 38% of the whole S&P rise. Their growth prospects look good as they continue to dominate their global sectors.

China has its BATs (Baidu, Alibaba and Tencent); and these three now make up 34% of the Chinese index and over 10% of the whole emerging markets.

Technological developments continue apace and in all aspects of our lives. More than half of the new cars sold in Norway in 2017 were electric or hybrid – the first time a country has reached this landmark. All major technology companies are international, which supports our favoured view of looking for growth outside the UK.