Market Commentary – 6th December 2017

Will 2018 be positive?

As we end the year, the markets head into 2018 in an optimistic mood. The current point where we are in the cycle is more broadly based than any other since the 2007/8 global financial crisis, especially from a valuations and growth perspective. Usually towards the end of the year, markets and investors optimism is strong without any signs that the party is over. This year world GDP grew by 2.9% and its expected by economists that this could grow by 3.2% in 2018, which will make 2018 the best performing year since the financial crisis.

What will drive this growth? Well, we have had strong global trade growth which has been a key attribution to the growth we’ve seen in 2017. According to economists, China contributed both directly and indirectly to around 70% of the initial pick-up in global trade growth in H2 2016 and early 2017. More recently, there has been signs that other economies and regions have stepped up the global growth trend such as Europe. Another contributing factor to the growth we expect in 2018 can be attributed to inflation and wage growth remaining weak. While GDP growth surprises, such as those seen this year, are typically accompanied by upside inflation surprises, this has not been the case this year. One important driver of inflation trends over the next year is likely to be wage growth, which will make a big impact on global GDP. With Emerging Markets (EM), these remain positive and favourable given that global growth is picking up. Strong global trade and the recovery in commodity prices are boosting activity, while the weak US Dollar and low US bond yields have been positive for financials. Investment growth in EM is typically sensitive to global trade growth and commodity prices and economist’s view is that there is scope for investment growth in emerging economies specialising in both manufactured goods and the production of commodities, to improve. Despite being helped by Developed Markets (DM), domestic demand is also likely to be positive next year. Finally, political uncertainty is unlikely to change the course of the global upswing. Economic risks have diminished over the past year or so and we now appear to be in a low volatility world (relatively). We head into a new year with fears of a downturn seemingly lower than it has been.

So, what are the risks going into the new year?

The near-term risks of a slowdown in China looks limited at this juncture given the robust growth they’ve had, also benefited by the US and the US Dollar. In Europe, the bloc continues to stage robust growth which is underpinned by all the strong economic data we highlight each week. In the US, we are closely looking at the tax reform issue, which seems to be developing well. With manufacturing PMIs coming out stronger, globally, this is another sign that the global economy is resilient, and this will replicate into firms investing more in themselves to produce more.

It is evident that global debt levels are rising with Emerging Markets, along with high asset price valuations. This is something concerning markets and is closely watched as this could potentially cause the next financial crisis. Nonetheless, the risks could linger and indeed worsen further before a correction, and this is a risk we will be watching closely, as central bankers adopt a more normalising approach to monetary policy, which will increase the cost of borrowing, generated from a period of low interest rates.

How was 2017?

In all, economists and market makers expect the broad-based strength of 2017 to continue into 2018, ensuring a positive environment for households, firms and financial markets. At a global level, given that GDP growth is expected to pick-up from 2.9% to 3.2%, with non-Chinese emerging markets and the US are the main drivers. Overall, next year’s growth ‘slower’ are only expected to see a modest slowdown, after recording exceptionally strong GDP growth this year (e.g. the Eurozone) or, as part of a managed transition which is probably necessary to ensure medium-term stability (e.g. China). Accordingly, for those economies, 2018 should still feel like an extension of the good times.

While geopolitical factors and domestic politics always have the potential to undermine growth and make households and firms more cautious, absent a US trade war or a North Korean conflict, such uncertainties are likely to be felt at an economy level rather than a regional or global level. More generally though, overall risks seem lower than over recent years. This combined with solid global trade gives a more encouraging outlook for commodities and easy access to cheap finance could trigger stronger global investment than we assume, boosting overall growth and trade, potentially pushing the global recovery into an even higher gear.

For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.

Model Portfolios & Indices

Over the last week we have seen most of the indices that we track convey mixed messages. In the US, we saw a tech sell-off last week and early this week with the Nasdaq dropping as investors buy banking stocks, which will benefit from rate hikes as predicted in the near short term. This has manifested itself globally. Following our notes from last week, we expect our asset rotation of the OBI portfolios rebalance to be completed by the end of the week. Given where we are in the economic cycle, we have changed our asset allocation view and we are currently selling down the non-equity funds in four separate tranches to avoid dilution charges, given the portion we hold. Once the rebalance is complete, we do expect the portfolios to continue to take advantage of the equity rally that is currently present in the markets. Having done our analysis, we are happy with the economic data and fundamentals which is driving global growth.

Important Information

The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European and Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.

This Day in History

On this day in 1884, the construction of the Washington Monument was completed. The Washington Monument is an obelisk on the National Mall in Washington, D.C., built to commemorate George Washington, once commander-in-chief of the Continental Army and the first President of the United States. Located almost due east of the Reflecting Pool and the Lincoln Memorial, the monument, made of marble, granite, and bluestone gneiss, is both the world’s tallest stone structure and the world’s tallest obelisk, standing 555 feet 5 inches tall according to the National Park Service. It is the tallest monumental column in the world if all are measured above their pedestrian entrances.

As always have a wonderful week and stay safe.

VBW

Jason Stather-Lodge  CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager