2017 was another bumper year for markets, but if you think 2018 is going to be just as serene, you can forget it. There you go. It’s not the boldest of predictions, but it’s what I’m offering.
While it is very much the time of year for prognostication, it is also only right to look back and see how my predictions for the past year have fared.
To be honest, the outcomes are surprisingly close to what I predicted, but the journey has been wildly different. For example, I correctly foresaw a good year for domestic equities under Donald Trump because of proposed tax cuts and infrastructure plans. What I did not predict was the next leg of the tech rally.
In Europe, I was closer to the mark. I felt that weak currencies and the earlier stage of the continent’s recovery would be good for the equity markets. That has very much proven to be the case, with Germany’s DAX and France’s CAC indices up 30.8% and 27.9% respectively for US investors. It is worth noting that 11.2% of that has come from a strengthening euro, but even with that factored in returns have been significant.
The big question mark for me was whether or not emerging markets could continue their long-awaited recovery in the face of a protectionist US president. I need not have worried. China led the way, with the MSCI China index, which tracks the listings available to international investors, up by nearly 50%. India was not far behind on a 40% gain, and the broad MSCI EM index climbed 31.9%.
At the racier end of fixed income, both high yield and corporate credits recorded positive gains in each quarter, generating 7.4% and 6.2% respectively over the year. This was a feat almost matched by municipal bonds, which were up 5.1%. But the real star of the bond show has been emerging market debt, with hard currency rising 7.8% and local up by 12.5%, with the latter hitting double digits for the first time since 2012.
The year’s big surprise for me was Japan. Going into the year, there was a feeling that Abenomics was running out of steam, but a snap election in October and a decisive victory for prime minister Shinzo Abe has capped off a great year for the country. People are getting giddy about the future for Japan – but we have been here before. This positive sentiment is just as likely to be a reaction to how little value there is out there at the moment as a genuine response to corporate and cultural reforms.
So what’s in store for 2018? That question of value is the itch that just won’t go away and is the reason why I can’t see the next 12 months being a breeze. Volatility is at astonishingly low levels and was all last year, with the VIX trading below 10 and the 300-day moving average of that index just above 11. Not even the threat of nuclear war with North Korea has been able to shake it from stubborn lows.
The backdrop of rising inflation and the end of quantitative easing are factors too large to ignore. The potential triggers for a correction are numerous: a misstep from a central bank, a succession of rate rises, a poor quarter for the tech industry or just the general squeeze on incomes from inflation all pose a risk. I just can’t say which one it will be. Good luck out there.
N.B. All figures accurate as at December 12, 2017.