While there were plenty of opportunities for markets to hit a rough patch last year – not least because of the UK’s ongoing negotiations to depart from the European Union (EU) and the nuclear tension between the US and North Korea – equities have just gone through a relatively strong period.
Emerging markets funds, especially those focusing on China, topped the charts followed hot on their heels in second place by UK smaller companies funds (despite uncertainty around the Brexit process and the UK economy) and European Smaller Companies funds generating some of the best returns in 2017.
Of course, you might wish more of your investment had been placed in the areas that have performed best, but I prefer to recommend maintaining a well diversified portfolio that isn’t too focused on identifying future winners and losers but one that balances risk with opportunities.
Although I do not encourage short-termism, the constantly changing global economic environment does offer potential to capitalise on tactical opportunities, but investors need to tap into a proactive approach to investment management in order to benefit from those opportunities. The days of being able to place your savings or pension fund in an investment and sit on it for years without adjusting or rebalancing are long gone if you want to maximise opportunities for good returns and/or maintaining income.
Source: FE Analytics
So what is the Outlook for 2018?
Mystic Meg can play no part in this and anyone’s ability to predict what 2018 may hold in store for us would no doubt be thrown off course by some unexpected Geo-political event unfolding. However, there are a few economic indicators that can assist with our planning and expectations.
Interest rates are expected to remain low, which means that investments held in cash or in bonds can expect continued low returns. This will boost demand for equity investments, offering the potential for a good year for those thinking of moving away from cash and for those already invested in the stock market.
The US economy is growing well, even without tax cuts or big spending on infrastructure. European markets continue to look attractive in relation to their more expensive US counterparts, yet remain home to many world-leading businesses and brands. The global financial system looks to have been substantially de-risked, with strides forward in terms of bank regulation and the putting in place of contingencies for adverse economic events. Closer to home the Bank of England still thinks inflation will fall from current levels.
So there’s no fundamental reason why a change of year should have an impact on markets, but psychology sometimes seems to dictate otherwise. The present lack of investor fear suggests that stock markets may be vulnerable to unforeseen shocks. However, financial markets have been resilient to geopolitical shocks in 2017. Equities have been performing well and for good reason – rising corporate profits, very low interest rates and the continuing attractiveness of stock dividends in relation to low government bond yields. Global economic growth should remain strong in 2018, as both advanced and emerging economies enjoy a synchronized upturn.