Record highs, tax reform and an uneasy calm
The Santa rally pressed on into early January, delivering record highs in the UK, US and parts of Europe while Japan reached a multi-decade peak. President Trump succeeded in steering through his tax-reform package, the European Central Bank raised its growth forecast, and the Fed lifted rates by 0.25%. The year closed with equity volatility at 50-year lows, but the question for 2018 is whether central bank tightening will finally test that calm.
A festive surge across global equity markets
The Santa rally pressed on into early January with record highs in the UK, US and parts of Europe, while the Japanese stock market returned to a multi-decade high. In sterling terms, the UK made up lost ground, gaining over 5% in December. Europe returned a little over 2%, and Japan and the US each added around 1%. UK fixed interest ended the month roughly 1% higher. Gains in the first week of January added a further 3% to Japan and emerging markets, and around 2% to the US, Asia and Europe.
President Trump succeeded in steering through his tax-reform package, which was expected to boost the US economy, though members of the Federal Reserve admitted they were uncertain as to the magnitude of that boost.
The ECB grows confident while UK growth forecasts slide
In central-bank land, the European Central Bank raised its forecast for economic growth in the region, commenting that they were certainly more confident than two months earlier. The US Federal Reserve raised interest rates by 0.25%, as expected, upped its growth forecast for 2018, and signalled the likelihood of a further three rises in the coming year. Consumer price inflation remained muted across most developed economies.
In stark contrast, forecasts of growth in the UK continued to decline, while Governor of the Bank of England, Mark Carney, had to write a special Christmas card to the Chancellor explaining why inflation had exceeded its 2% target by over 1%.
The soap opera that is Brexit claimed a "major success" for Theresa May in securing agreement to enter the next phase of talks. This triumph showed just how easy negotiations can be when agreeing to all the EU's demands. Getting the eventual package approved by the UK parliament is likely to be a tougher challenge.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Central bank tightening will test the calm
Last year was one of the most tranquil in history, with equity volatility falling to 50-year lows and bond-market volatility the lowest in 30 years. Various explanations have been offered, ranging from the ongoing safety mechanism of central bank buying to the increased use of passively run funds designed to indiscriminately buy shares across the market.
One key change in 2018 will be central bank tightening. For the first time in decades, the Fed will end 2018 with a smaller balance sheet than it started the year with. Economically, central bank tightening is aimed at keeping things as they are: steady growth with inflation under control. In financial markets the consequences are less clear. Gradual withdrawal of QE will test markets, and while this is likely to be driven by stronger growth and higher inflation, meaning equities could still be all right, the outlook for bonds is far less certain.
For several years shares have climbed a steep wall of worry, but recently the mood music has changed. Many commentators are now prepared to look through global monetary tightening and worrying geopolitical concerns at improving earnings and steady growth. The consensus view is that monetary tightening will continue to be well signalled, very gradual and erring on the side of not upsetting the growth train.
In the past, such euphoria would be the signal to trade the other way, switching into bonds and cash. However, with bonds looking more vulnerable than equities, and cash paying next to no income, the decision is less clear-cut. It could be that stock markets continue to grind ever higher, but it might also mean that, in the event of a negative surprise, there is an undignified rush for the door with investors battling to exit positions.
We still expect a correction at some point and feel this would be a healthy reminder that markets are not a one-way bet. However, we appreciate that an environment of steady growth with low inflation will continue to attract investors seeking returns above those offered by cash deposits.
With bonds looking more vulnerable than equities and cash paying next to no income, it could be that stock markets continue to grind ever higher, but a negative surprise could trigger an undignified rush for the door.
We are continuing to run diversified portfolios, with lower exposure to bonds, and with the capacity to take advantage of opportunities when they become available.
Gold and silver delivering results
Our recent switch from the Blackrock Gold & General fund into the Old Mutual Gold & Silver fund paid off, with the exposure to silver generating a 4% outperformance over the month and an 8% rise overall.
Emerging markets contributing
Our emerging-market fund had a good month, gaining over 4% in sterling terms.
Benefiting from specialist exposures
The higher-risk portfolios benefited from their exposure to biotechnology and agricultural funds.
Underweight bonds, ready for opportunity
We are continuing to run diversified portfolios, with lower exposure to bonds, and with the capacity to take advantage of opportunities when they become available.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →