Don’t overdo the gloom, says Brian Tora, because the global economy in 2018 is still fundamentally strong. But do keep an eye on the risk factors
In the end, 2017 was kind to investors. The FTSE 100 Share Index ended the year at an all-time high, as did several other major markets. True, the overall increase was not as great as that seen in the US and Japan, but it was still a plus, and perhaps it leaves room for further progress in the current year.
Bear in mind, incidentally, that the Footsie was only about 10% above the level that it had reached eighteen years previously when the technology boom was driving markets into what turned out to be bubble territory. So should we be drawing comparisons between then – the end of the last millennium – and now?
There are some similarities, but the differences are particularly marked and worthy of examination. Both the political and geo-political landscapes are less predictable than they were in 1999. That ought to make investors more nervous, but in fact the economic picture has improved sufficiently to allow a degree of confidence to creep in.
Anyone for Top Trumps?
That said, there have been plenty of predictions that this long bull run, which started back in 2009, cannot last much longer. The biggest area of risk appears to be the United States, where probably the greatest political uncertainty lies.
President Trump remains an unknown quantity one year in to his first term. His programme of change to deliver an America First agenda has experienced considerable problems getting off the ground, while controversy continues over the methods used to gain his ascendancy in the polls. While Trump’s tax cuts do seem to be on track (and they were into their final stages as we went to press), opinion is still divided as to how much of a boost this will be to markets?
One effect is likely to be the repatriation of corporate cash held overseas. How businesses might use this resource is currently hard to determine, but in the past share buybacks have been favoured by boardrooms.
In theory, this should boost markets by limiting supply, but past experience shows that this need not prove to be the case. Moreover, enhanced cash resources could fuel an acquisition boom – again, a potential short-term plus for investors, although again such an approach can be value-destroying for those companies launching their takeover strategies.
But the overall expectation is that the US should help to lead a strong upswing in global growth in 2018.
The end of cheap money
The major risk, from my perspective, remains the ending of very cheap money. The Federal Reserve Bank has already started to reverse its quantitative easing stance, which brings us to one of the similarities with 1999/2000. Easy money made available ahead of the new millennium found its way into technology shares, which tanked when this policy was withdrawn early in 2000.
Of course, it is difficult to be certain how much influence the cheap money approach has had on share ownership, but it would be naïve to believe that higher interest rates will not have some impact on markets. While the US and the UK are the only major central banks to have started putting interest rates up, the Bank of Japan and the European Central Bank are likely to join the monetary tightening party as the year progresses – even if we may have to wait until 2019 before they feel brave enough to increase the cost of money.
One effect of this change of tack must be to reinforce inflationary pressures. Already inflation has risen markedly here in the UK, although we should add that this is down to a falling exchange rate, rather than suggesting consumer-led upward pressure on prices. Indeed, consumers here remain constrained by declining living standards – a point which was underscored by the post-Christmas trading updates from some major retailers. The positive, on the other hand, must be that all this is necessarily slow burn – so that, given any unexpected shocks, markets should have time to adjust to what must be a changing environment as the year progresses.
An uncertain planet
The “known unknowns”, of course, are the many continuing geo-political issues which are as dangerous today as they have ever been in living memory. 18 years ago, Iraq was centre stage; today, however, it’s not just North Korea that casts a threatening shadow over world peace – in the Middle East, the proxy wars between Saudi Arabia and Iran, the continuing involvement of Russia in the Syrian conflict, and the evaporation of peace talk initiatives between the Israelis and the Palestinians also remind us that the cauldron that is the Middle East is as volatile as ever.
Which is where we return to the unpredictability that constitutes the Trump presidency. As the arguable leader of the West, we all hope for direction from the world’s largest economy. But Trump’s decision to withdraw from climate change initiatives, and his determination to make America more protectionist, both demonstrate that the President’s priorities may not accord with the rest of the developed world. This is not necessarily a negative for investors, but it does add to the degree of uncertainty that needs to be factored into portfolio strategy.
My conclusion is that advisers and their clients should not expect as benign an environment as that which characterised 2017, but that even so, the bullish sentiment that has supported markets may well have further to run.
Markets tend to anticipate, rather than follow, events. A setback could occur either if a geo-political explosion occurs, or if the Goldilocks economic scenario approaches the end of its road. Sadly, neither is capable of being forecast with any degree of accuracy.