There were a few major themes to focus on:
(1) The Trump Bump - Trump managed to scrape through with his tax plan before the end of the year, and without the feared trade war with China (or anyone else) breaking out. There remained an uneasy calm over the latter, despite Twitter based rhetoric promising something more aggressive. In that environment, corporate earnings remained solid and underpinned by a Fed which maintained a stance of gradual, but very transparent, tightening.
(2) Emerging Markets Back In Vogue - Proving that a stable US and a weaker USD were supportive of growth, Emerging Markets had a strong year, with a 38% gain in the MSCI EM Index. EM currencies rallied too. Our favoured picks of Vietnam and India did well on the back of continued reforms, even if the implementation of some of them - notably India's replacing of high value bank notes - caused significant short-term stress.
(3) Politics produced surprises - Politics produced some significant surprises for markets notably in France, (Macron beating the two established parties in both presidential and parliamentary elections), Germany (Merkel's previously unquestioned dominance being undermined by weak support), the UK (Theresa May's disastrous performance in the General Election resulting in a hung Parliament), and Japan (Abe being returned with a strong majority).
(4) What global order? - With Trump's "America First" agenda in place, there was much greater uncertainty over global geo-politics than has been the case for a decade or more. Tensions with North Korea remain high and still have the potential to produce short-term shocks (although despite this the South Korean stockmarket still rose by more than 20% in KRW terms).
(5) Companies are doing fine - Perhaps proving the point that everything else is just noise, the global corporate sector had a good year. Earnings growth remained solid and more predictable than it has seemed for some time: this was prompted by the fact that major global economies all produced some of their fastest growth rates in a decade. The icing on the cake - for US companies - was Trump's year end tax cut which looks likely to boost earnings growth in 2018 by more than 8%. Helpful too was the 18% spike in oil prices as major oil producers proved more successful than previously in maintaining production cuts.
So - is it "More Of The Same" for 2018...?
On the face of it - yes. At least for the first half of the year:
* Trump's tax cut will be a positive influence for US companies this year and help to underpin otherwise high valuations. This pre-supposes, of course, that the protectionist leanings of his administration remain restrained.
* The "New Fed" under the new chair Jerome Powell seems likely to continue to policies of the "Old Fed", even if it will be the first time in a number of decades that the senior Fed leadership is made up of non-economists. Gradual interest rate increases which are well-telegraphed seem likely to continue, barring any inflation shocks (our number one risk for 2018).
* Emerging Markets still seems at the beginning of a secular up-trend on the back of both strong external and domestic demand, coupled with continuing focus by many governments on economic reforms and productivity improvements.
* Politically, we have the ongoing discussions on the mechanics of the UK's Brexit from the EU. This looks as though it will be characterised by the appearance of steady progress in the first half, but with the potential for a real blow-up later in 2018 as we edge ever closer to the March 2019 exit deadline (now only 15 months away). Politics in the EU could still be difficult, led by Italy's forthcoming election and by Germany's still unresolved government talks. Later in 2018 we also have the US mid-terms where Trump will be gunning to hang on to majorities Congress, whilst the Democrats will be looking to overturn them....
* ....and in the background, companies will just carry on. Earnings growth still looks solid, boosted by rising domestic demand across most economies and continued low interest rates.
On that basis, equities continue to look the preferred asset of choice (and other assets continue to look relatively more overvalued). Much the same as 2017. Happy New Year!
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