We remain long equities as an asset class into 2018. Global growth is strong and importantly Europe and Emerging Markets are participating along with the US. There are of course several areas that we will continue to monitor during the year, but we don’t see cause for major concern. While we believe 2018 will see a rise in volatility, we do not believe it will be of a substantial enough nature to derail equity markets.
At the start of 2017 analysts’ thoughts were dominated by political risk and implications for markets. Mr Trump had just entered the White House, the UK voted to leave the EU and there was a widespread rise in anti-establishment politics across the developed world. Equity market expectations were dominated by extraneous factors such as politics rather than fundamentals.
Looking back investors might wonder why they ever worried. The major bout of political volatility centred on North Korea, which carried out various missile and satellite launches with markets generally nonplussed by the spectre of a nuclear armed North Korea. Europe started off Q4 weak due to Catalonian secession worries but these were soon shrugged off and European equities finished strongly into the end of the year. The market in the meantime went back to assessing fundamentals.
From that perspective, 2017 was a good year with consecutive quarters of above average earnings growth. Unlike previous years, this trend occurred not only in the US but also across Emerging Markets and Europe. Apart from a slight summer wobble in the US, economic data was excellent across the board with both leading and lagging indicators beating expectations. Equity markets were buoyant with the prospect of US tax reform becoming a reality, potentially adding 3-5% to earnings expectations in 2018.
So is everything rosy as we move into 2018? We do not see enough dark clouds on the horizon to worry us and we remain long equities as an asset class into 2018. However, there are some notable trends and a shift in central bank dynamic that warrants some attention. For our clients, it is increasingly important to review portfolio diversification over the next few years from a regional, sector and asset class perspective.
Firstly there was the flattening of the US yield curve, which is normally indicative of a recession. The spread between the US 10-year and 2-year yield moved from 1.27% in January to just 0.53% at the end of the year. 40bps of this was done in Q4 alone. One other point to note is the shift in dynamic by most central banks. The majority of global central banks have now moved into a monetary tightening policy phase, albeit at a very gradual pace. This reduction in liquidity over the next 3-5 years is likely to impact equity markets negatively just as quantitative easing supported equities. Another major factor to be aware of is simply the length of the current bull market. As we move into 2018, this equity bull market reaches the age of 9 years old, making it the second oldest since World War II without at least a 20% drop, eclipsed only by the period from October 1990 to March 2000.
Now for the good news!
Bull markets do not die of age alone. Historically, there has to be a catalyst, such as worsening economic data or a central bank policy mistake, preceding a bear market and we do not see substantial evidence of that as we move into 2018.
Global growth is strong. Households and businesses do not appear to be excessively leveraged from a historical perspective. Monetary policy, despite definitively moving into a tightening cycle, remains accommodative with very gradual, data dependent rate rises along with a slow reduction in the major central bank’s balance sheets. Inflation remains contained while growth has picked up across the world indicating the global economy is in something of a sweet spot. Credit spreads, despite some periods of volatility in 2017, remain historically tight. Lastly, the flattening yield curve, while being a good predictor of recessions has yet to invert. Typically, equities do not peak before it inverts, only afterwards, suggesting any potential downturn is still a while off.
Although we continue to favour European equities over US and UK, we are not completely bearish on US equities and believe it will be a stock picker’s market this year. We remain relatively bearish on bonds and expect the Euro to continue to strengthen. For commodities, we anticipate a continued rally, although not across the board. Property remains attractive given the general low yield environment within Europe.
For more detail on key market trends and the outlook for equities, bonds, currencies and commodities, click here to read our 2018 Global Market Outlook in this month’s Investment Journal.
To speak with a Portfolio Manager or Account Executive today, phone the Cantor Fitzgerald dealing desk on 01 633 3633.
We have assessed this communication and have classed it as a Minor Non-monetary Benefit under MIFID II. This is not investment research and the content will not contain any trade recommendations. The content will include only non-substantive materials or services consisting of short term market commentary on the latest economic statistics. It will not include fundamental and/or original data manipulation, detailed analysis or long term future predictions. The amount of time spent on compiling this is less than 1 hour per day.
This is the view of Cantor Fitzgerald Ireland. All recipients of this communication should carry out their own assessment of the material to determine if it is minor non-monetary benefit.