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2017 investment returns have largely confounded many investors’ expectations that the continued market rally may have halted or even reversed. Markets have largely dismissed the political uncertainties that continue to overlay most of the global economy and we enter another year where commentators will speculate on “are returns too good to be true?”
As with any outlook forecasting, it is important to weigh up both the potential headwinds and tailwinds for market returns.
Investors should remember that after many years of loose monetary policy in the form of low interest rates and asset swap programmes (Quantitative Easing (QE)), we should expect some form of upward economic growth and it is certainly the case that the measure of growth (known as Gross Domestic Product or GDP) around the world is good and especially so in many of the larger economies, including the United States. This will usually find its way into increased corporate earnings which in turn helps to keep asset prices buoyant.
It is also the case that in recent times, Western governments have sought to downplay their austerity agendas in the face of public fatigue and opposition. Talk of public spending and infrastructure (think HS2 and Crossrail) would indicate a loosening of fiscal policy to accompany already loose monetary policy. All of which is music to the market’s ears.
On a policy basis, the swift implementation of US tax reforms and the dissipation of a Trump impeachment would certainly be helpful. Looking further ahead, as economic growth continues to improve we expect central banks to begin tightening their policy by increasing their base rates and perhaps even reversing the QE. In the medium term, the extent and pace at which this is done will be key to investor sentiment and market reaction.
At the beginning of 2017, we highlighted European general elections as a potential source of political instability and subsequent market unrest. As it transpired, all three key general elections (Holland, France and Germany) saw the status quo largely maintained with the appointment of three relatively mainstream (and pro-EU) leaders. 2018 will see the Italian general election take place in March.
The reverse of these events present an element of risk. A US political meltdown, a reversal of monetary policy deemed too aggressive and political instability in Europe. Geopolitical risks in the form of Korean peninsula tensions, the Middle East and extremist terrorism should also not be ignored. Ultimately, the number of permutations of unknown events is endless, which has always been the case and it continues to advocate the case for proactive and efficient portfolio management.
Our investment team have remained fully engaged and invested, whilst at the same time exercising the caution we feel any responsible investment manager must do in this environment. At some point we anticipate that a yet more cautionary tone might need to be adopted but for now, positioning looks appropriate. Vigilance will remain a key factor and when market complacency eventually wears thin, the creativity to make the right strategic changes will prove a major performance differentiator.