John Husselbee

2017 in review – and a glance towards 2018

John Husselbee

Looking back at 2017, the overriding story has been a very consistent one: ongoing political volatility on one hand and markets breaking their fresh highs on a frequent basis during the year on the other, and little apparent relationship between the two.

What this has laid bare, for me, is the difference between correlation and causation. With politics so dominant in the news, many investors expect it to have a meaningful impact on sentiment and market movements. In fact, however, while most of 2017’s political events did have a brief impact on performance and volatility, none proved sufficient to derail markets as they competed with stronger drivers of improving economies and earnings.

With Brexit an ever-present ghost at the feast, we have seen elections in the Netherlands, France, Germany and the UK all showing signs of the populism that drove the vote to leave the EU and the election of Donald Trump in 2016.

March featured the first of 2017’s many flashpoints as the Netherlands went to the polls, although the incumbent centre-right VVD party ultimately proved able to beat the populist anti-immigration candidate Geert Wilder’s eurosceptic PVV.

The French election showed another populace tired of the status quo and seeking fresh political choices, with the widely tipped Republican Party pushed down into third place and François Hollande’s Socialists fifth. The final contest was between former economy minister Emmanuel Macron and far-right candidate Marine Le Pen, with the former winning comfortably in early May and thus became France’s youngest ruler since Napoleon. Macron’s victory eased fears of a ‘Frexit’ had Le Pen won power.

June was dominated by what turned out to be a fairly chaotic election in the UK, providing a kick in the teeth for the Conservatives. While Theresa May called the election expecting a stronger mandate for Brexit negotiations, the nation voted along traditional lines of public services and taxation and the party has struggled to regain momentum in the subsequent months.

Finally, Angela Merkel won a fourth term as Germany’s Chancellor in September but the hard-right Alternative for Germany (AfD) became the third-largest group in the national parliament as populist voters delivered yet another blow to traditional parties.

More recently, ugly events in Spain surrounding Catalan independence show the hugely damaging impact of political bullying on the global stage. I remain convinced a hard Brexit is far from a political certainty – particularly with the Tories struggling with scandals – and expect the debate to rumble on for months and possibly years to come.

Of course, events in the US have dominated the news agenda, with President Trump’s first year in the White House full of the ‘fire and fury’ he threatened to rain on North Korea – in terms of rhetoric at least, if not actually managing to enact many of his grand plans.

Nuclear sabre-rattling understandably has the world on edge and there is no sign of this President calming down as his term in office continues.

Despite all this activity, however, most economies around the world have continued to improve throughout the year and we look to be in the strongest position since the financial crisis, with slow but steady growth and inflation broadly in check. The UK remains something of an outlier on the latter due to sterling’s weakness in the post-Brexit environment.

Equities have continued on an upwards trajectory, with the so-called Trump bump lasting much longer than expected and improving earnings putting a stronger floor under this market surge. Meanwhile, volatility has remained around record lows for much of the year, with none of the major political events enough to cause a sustained spike.

What conclusions can we draw for 2018 given such an environment? At a portfolio level, we remain fairly comfortable in the current Goldilocks conditions as low inflation and slow but steady growth persist. The key question is what is making up that growth and how long can it last – and this is likely to dominate sentiment into 2018.

Much of the focus in recent weeks has been on tentative steps from certain central banks towards policy ‘normalisation’, with the US Federal Reserve announcing how it will taper quantitative easing (QE) and the Bank of England pushing through its first interest rate rise in a decade.

Whatever people think about the latter – the start of sustained rises or a one-off to correct a cut post-Brexit that proved unnecessary – we are moving into a new stage and markets will need to learn to survive without the safety net that QE has provided. That said, no one is suggesting all the money will be stripped out overnight and policy remains extremely accommodative. There have been fears about a change of course from the Fed under incoming chair Jerome Powell but this former investment banker, while Republican, has broadly supported current chair Janet Yellen.

As with any change of leadership, we would expect fresh rhetoric as the new person looks to make their mark but any move to stop an ordered path out of QE would be ill-advised.

We have written at length about some of the factors that might derail markets in 2018 and these – central bank mis-steps as we withdraw from QE, a hard landing in China and a sudden spike in inflation – remain on the radar. Unless some black swan appears around the corner, however, we cannot see an imminent crash.

Equities remain more attractive than bonds and cash but we need to be wary of complacency after a year in which global markets are up close to 20% in dollar terms. While no one is ever keen for a downturn, we have long been surprised not to see the kind of 5% to 10% correction that has traditionally been a function of healthy markets and would not be overly concerned if such a recalibration does materialise.

As ever, we continue to look to buy favoured areas when they are cheap and are currently eyeing an opportunity in value stocks, where performance remains far removed from the growth companies that have made hay amid Trumpflation. We felt this could be a theme for 2017 but value has remained depressed and we believe now may be a good time to increase exposure to this cheaper end of the market via funds such as Fidelity Special Situations.

To sign off with some Christmas cheer, we are currently in a rare situation in terms of the global economy, with all 45 countries tracked by the Organisation for Economic Cooperation and Development (OECD) on pace to register growth in 2017 and 33 of these accelerating from 2016.

This is the first time since 2007 that all of these countries are growing in sync and the most countries in acceleration since 2010, when many enjoyed a fleeting bounce from the global financial crisis. In the past 50 years, such simultaneous growth has been rare: apart from 2007, it only happened in the late 1980s and for a few years before the 1973 oil crisis.

That would seem to signal a good backdrop next year and for anyone concerned about a major pullback after such a long bull market, we continue to believe there could be plenty left in the tank. During the bull market that stretched from 1987 to 1999, the FTSE 100 rose close to 340%.

In the current post-2009 run, the index is up around 90% so no one can claim we are in a situation without precedent.

As always, however, we stress our crystal ball is no clearer than anyone else’s and continue to maintain our long-term patient investment approach in a world that will consistently find ways to surprise.

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Friday, December 8, 2017, 10:39 AM