Hello and welcome to this month’s equity market review with me, Ritu Vohora.
Global equities continued to rally in November on the back of positive macro data, improving corporate earnings, and accommodative policy from around the world. Returns for euro investors though, were marginally negative.
Happy New Year and welcome to this month’s equity market review with me, Ritu Vohora.
Global equities set new highs in twenty-seventeen, closing one of the strongest years since the post-crisis recovery. Despite news headlines being dominated by geopolitics and sabre-rattling, investors batted these concerns away as earnings grew and returns were made on most stockmarkets.
In December oil and large-cap UK stocks were the top performers, the latter boosted by a recovery in commodity prices and easing concerns over the risks surrounding Brexit. Emerging markets also continued to rally, cementing their leadership for the year. At the other end of the table, the dollar continued to weaken, as the currency recorded losses for the year.
Looking at sectors, energy led in December on the stronger oil price, but was one of the weaker sectors over the year. Despite a rather flat month, technology finished twenty seventeen as the star performer, with materials in second place.
Momentum was the leading style in December and for the year.
As the New Year begins, investors may be wondering if twenty-eighteen will bring as many positive surprises as twenty-seventeen. When for the first time on record, global equity markets rallied in all 12 months of a year.
For much of twenty-seventeen, we highlighted the synchronized upturn in global growth and the improvement in growth fundamentals, which has been broad-based across regions and displays self-reinforcing dynamics. This is particularly true in Europe, where increased employment is supporting consumption and investment, and further supporting growth. Despite concerns about the age of the current cycle, the macro environment is as good as it has been in a number of quarters.
Against this backdrop, central banks have kept monetary policy accommodative, as inflation has remained stubbornly below desired levels - leaving financial conditions buoyant. Outcomes from policy meetings in December continue to send the message that central banks remain reluctant to rock the boat with more aggressive normalization plans.
The Fed raised rates while signalling a preference for letting any fiscal stimulus pass through to economic activity, with little offset from monetary policy. A similar message was delivered by the E.C.B., after upgrades to the outlook for growth and inflation prompted no change in the policy stance.
Non-conventional central bank policy, since two-thousand and eight, has sent waves of liquidity flooding through global asset markets. In twenty-seventeen, this ample liquidity and a synchronised pick-up in global economic growth provided a favourable backdrop for risk assets.
The majority of the world’s forty-five major economies tracked by the O.E.C.D. grew in twenty-seventeen and are this year expected to post another year of growth, even though the pace of growth is likely to cool somewhat. It has been a decade since the boost to the world economy was this broad.
The combination of robust growth, contained inflation, and very slow policy normalization has been a powerful driver of risk assets, especially global equities. When global growth drives expansion, it shows up in corporate earnings. In twenty-seventeen, returns were driven predominantly by corporate earnings growth rather than multiple expansion.
The typical progression for earnings through the year - is a steady stream of disappointments. However, twenty-seventeen was the first year in a while, where Eurozone earnings were not downgraded and global weekly earnings revisions – the ratio of analyst upgrades to downgrades – were outright positive the whole of the year, a rare feat.
Going into twenty-eighteen, it’s unlikely we will see last year’s very strong stockmarket performance repeated. However, global earnings growth continues to be reasonably robust, while interest rates and inflation remain low and relative valuations of stocks to bonds are reasonable - typical of the later stages of a market cycle. This should help markets grind higher, with equities continuing to outperform bonds. In a world of lower returns – being active and selective will be key.
Whilst a recession doesn’t look imminent, with markets priced for ongoing moderate growth and low volatility, the key risks ahead include the potential for higher inflation and a policy mistake - with more central bank tightening than expected.
We are at the beginning of the end of central bank dominance. Peak liquidity is behind us, as central banks start to remove some of their extreme monetary accommodation. Conversely, tightening is in its infancy. The question is how aggressive will the turn be and what will the effect of a change in liquidity provision be on various asset prices?
Tightening will likely be gradual, particularly if the ‘Goldilocks sweet spot’ of stronger growth and low inflation continues. The prospect of interest rates remaining low, or rising only very gradually, should continue to underpin stock prices.
We therefore believe equities remain the asset class of choice in twenty-eighteen.
To hear more of our views from across the equities floor, please sign up to our blog... the equities forum.
That’s it from me and see you next time.