The Multi-Asset Process

December 2017 market review

Anyone hoping for some Brexit respite in the final weeks of the year would have been sorely disappointed as the subject dominated the news once again in December.

Days of talks between UK and European negotiators eventually ended in what Theresa May called a hard won agreement to move things to the next stage although months of debate on citizen’s rights, the cost of the divorce bill and issues such as borders with Ireland are still to come.

As ever with Brexit, the Prime Minister’s so-called victory was followed shortly by disaster, with Conservative rebels in the Commons defeating the Government in a key vote. MPs backed an amendment giving them a legal guarantee of a vote on the final Brexit deal struck with Brussels – which can only muddy what are already filthy waters.

Another prevalent trend through 2017 has been a series of fresh highs for equity markets and once again, December did not disappoint. On the last working day of the year, the FTSE 100 again hit an all-time high of 7687 and indices such as the S&P 500 also registered new records during the month.

Overall, the blue-chip UK index gained close to 8% over the year, while Japan’s Topix and the S&P 500 were both up around 20%. Global stocks, as measured by the MSCI All-Country World Index, rose in every single month of 2017, the first time shares have avoided any monthly declines within a calendar year.

December proved busy on the macro front, with the Federal Reserve’s third interest rate hike of 2017. Widely expected in the market, the Bank said this hike underscores solid gains in the US economy and also boosted its economic forecasts for 2018, allowing outgoing chair Janet Yellen to paint a positive picture of her tenure.

"There's less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook," she said.

The Fed anticipates three further increases in rates next year, unchanged from its previous forecast.

President Trump also managed to pass the biggest tax overhaul in three decades during the month and, while there remains plenty of controversy surrounding these measures, the benefits for corporations and individuals are expected to boost many sectors of the economy in 2018.

Elsewhere, November’s inflation reading of 3.1% required Bank of England governor Mark Carney to write a letter to Chancellor Philip Hammond (to explain why it has strayed more than 1% away from the 2% target).

While that uptick in inflation may look alarming, the overwhelming consensus of economists believe rising prices should now have hit their peak and will not concern the Monetary Policy Committee. The largest upward contribution came from airfares, which fell by less than in 2016, and core inflation actually held steady around 2.7%.

Looking into 2018, equities remain more attractive than bonds and cash but we need to be wary of complacency after such a strong year for stock markets.

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 as we have long said, would not be overly concerned if such a recalibration does materialise.

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 surging growth companies. 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.

We see this as a broad trend, most obvious in the US, but also prevalent across Europe, Japan and Emerging Markets.

Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This Blog should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, January 9, 2018, 3:03 PM