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The week

January 2018

Some New Years start with a burst of enthusiasm; a blast out of the blocks, let’s-get-it-on and buy some equities sort of start. Make no mistake, this doesn’t feel like one of those years.

  • While there is much to be cheerful about at the start of 2018, there are pressure points
  • Some of these pressure points are market-related – nascent bubbles in certain asset markets, for example
  • The key pressure point may be an increasing challenge to capitalism itself

In some ways there is plenty to be cheerful about as 2018 begins. The world economy looks good, certainly. The traditional laggards of the global economy – Japan and Europe – have defied the naysayers and look better than they have done for years. The US economy shows few signs of rolling over and the Federal Reserve is still confidently predicting three more interest rate rises in 2018.

But there are clear points of stress. Richard Buxton, chief executive of Old Mutual Global Investors, recently dismissed the idea that the equity market as a whole was in a bubble, but said there were definitely certain sectors that were in bubble territory. Then there’s Bitcoin and the cryptocurrencies, of course, but there are also less obvious areas that look stretched – certain corporate bond valuations, for example.

Valuations are not the only problem. There is a wider challenge to capitalism itself. It is clear that the spoils of capitalism are not being shared equally and this is becoming a greater problem. So-called ‘Fat Cat Pay Day’ – the day when top company bosses will have made more than the typical UK full-time worker will earn in a year – falls on 4 January this year. That is an uncomfortable statistic for UK plc.

Productivity and wages continue to lag behind economic growth and this is contributing to a sense of social unease. Populist movements may have been temporarily laid to rest, but they are not likely to dissipate with stronger economic growth as they have in the past. As technology threatens an increasing number of jobs, governments will need to find better solutions.

This means that the role of fund managers is becoming more complicated. Of course, it was never simply a case of considering economic growth versus stock market valuations and making a call, but there are an increasing number of variables that investors must consider. Some truisms – that economic growth leads to individual prosperity, or inflation, or that it eases social tensions -  are facing real and enduring challenges.

Perhaps stock markets can keep rising in 2018, perhaps fat cat bosses can keep earning their inflated pay, perhaps Bitcoin can keep rising, but it all feels like a party that is drawing to a close. Investors will need to be smarter in the end.

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