Javblog

Javblog

Monday, January 1, 2018

That was the year that was

At the start of 2017, market forecasters were either cautious or cautiously optimistic. Precisely no-one was predicting a 25% gain in global equities, but that, now has been the end result. If you were a USD based investor, you'd be happy since the weaker dollar boosted your returns. You would have been a bit less so if you'd invested in most other major currencies which generally saw gains of between 8% and 10%.

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!

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth

Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.

Wednesday, November 22, 2017

Party like it's 2018...?

We've been looking at forecasts for 2018 now that we're almost at the end of 2017. With global equity markets having risen by over 20% (in USD terms) and a number of individual markets having done much better than that, it begs the question as to whether 2018 can even come close.

So far, the forecasts we've seen point to an 8% rise for the S&P500 (from current levels), +17% for Europe (ex UK), +24% for Japan, +12% for AAXJ. On the fixed income side, while yields are expected to rise, it seems as though expectations of US rate rises of between 0.75% and 1% are being treated as the likely limit.

So - all's good for 2018? Perhaps, but...

We've also had a look at the factors that - if they arise - could pull the plug on the party. These revolve around 2 main factors: inflation and earnings.

On the inflation side, since 2008, we've all got used to inflation being essentially moribund. Chugging along at historically low levels and with interest rates to match. Obviously this can't continue forever and it's unprecedented that inflation should have remained in low single digits for almost a decade now. Central bankers have been struggling to get inflation up and into economies for quite a while: they have cut interest rates to try and bring this about. So far, this globally easy liquidity has not had the desired effect on inflation outside the property and investment markets. The clearest evidence of this is in Japan, where, despite some of the best earnings growth prospects for 2018, inflation remains notable by its absence.

However, with unemployment levels, especially in the US, now effectively at a point consistent with the definition of full employment, it must start being reflected in faster wage growth. At some point, this should then start being reflected in inflation data. We think that this could be the number one risk for markets in 2018, especially in the second half of the year: if inflation data picks up more quickly than expected, then the US Fed may feel greater pressure to boost interest rates above and beyond their current "measured pace" (even more so with a new Fed Chairman in place and a largely overhauled board). It doesn't take much to work out the effect of sharp increases in interest rates on economies and markets which have become so heavily reliant on low cost loans to fund continued expansion.

On the earnings side, at present, expectations are for global market earnings growth of low double digits for the US and higher for pretty much everywhere else. Those earnings expectations - we know - are used as justification for current share prices and to back the forecasts of further share price rises into 2018. However, we have also seen how, with individual companies, disappointing earnings announcements result in sharp sell-offs. At present these individual earnings "misses" seem to be ignored by the broader market. The caveat is that if these one-off fails were to start becoming part of a more of a systemic pattern, then we can expect a big correction. At present this seems overly pessimistic, but it is also true that with markets valued as highly as they are, it won't take much for investors to start worrying.

On that basis, these are the two things that we're watching most closely as we head into 2018, especially the second half when the inflation outlook will start to become clearer. 

Whilst we don't think that these are cause for concern as yet, and therefore have no plans to shift portfolio allocations for the next few months, the higher the market valuations get, the less room there is for disappointment.


Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 65577185
Find us on Facebook: http://www.facebook.com/JavelinWealth


Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.