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Farewell to all that

December 2017

2017 is drawing to a close. Was it a classic for investors?

  • 2017 was all about the rock ‘n’ roll asset classes – Asia, smaller companies, technology
  • Markets in aggregate look expensive, but under the surface there are still plenty of opportunities.
  • 2018 could be the year when inflation returns with extra bite

2017 had a feel of the end of the party. It was all about the rock ‘n’ roll asset classes – Asia, smaller companies, technology – while anything boring or staid was left behind. No-one wanted government bonds, or income stocks or targeted absolute return.

Markets, in aggregate, have done pretty well, but there has been a lot going on under the surface. Above all, investors have liked predictability of earnings. This has seen some of the consumer staples stocks rise 20-30%, far more than would ever be expected from a steady-eddie defensive stock. In the meantime companies that could not offer the same predictability have been hit hard. Some of the property companies, for example, have seen share prices slide.

It wasn’t the type of market most were predicting at the end of 2016, but then, it seldom goes that way. Where does it leave us at the start of 2018?

Markets in aggregate look expensive, but there are still plenty of opportunities. Some of them may well be found within the UK. No matter how many times it is argued that the UK market is international, revenues are drawn from abroad, it is still under a Brexit-sized cloud. This has left it lagging other markets this year. At some point, there should be a clearer path on Brexit and some UK companies will be reappraised. However, it is difficult to say whether it will be this year.

Within emerging markets, everything has been about Asia. Its technology names have drawn all the glory. Other emerging markets – Latin America, Eastern Europe – have simply not kept pace. Asia does not necessarily have a monopoly on innovation and, as such, there may be opportunities elsewhere amid these faster growing economies.

There is also the question of active versus passive. Active managers will tend to argue that expensive markets are a good time for stockpickers, but this neglects the momentum trade that often accompanies the end of a bull market. Fund selectors appear to be dividend on whether to try and play this momentum trade, or whether stockpickers are the answer.

Either way, 2018 will undoubtedly surprise us once again. Markets have the tailwind of the Trump tax cuts, which should start to feed into accelerating economic growth. Could this be the year when inflation finally returns with a vengeance?   

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