Market View February 2018

Image of a glass globe with dark blue colours.

Investing

Andrew Milligan

13th February 2018 at 4:26pm

As we move into February 2018, I look at how global markets are performing and what opportunities lie ahead for investors. I also take a closer look at some of the important issues we need to consider throughout the year.

Recent market falls – is it time to review your investments?

It’s always a good idea to keep a close eye on your investments and recent market falls aren’t necessarily a big negative. In fact, we’ve been highlighting for some time now that a downwards correction in stock markets wouldn’t come as a surprise. Not just in the US but across the world.

Share prices in most countries have experienced significant upward moves over the past 12 months and there have been clear signs that they had moved too far, too fast. With that in mind, this moderate sell-off in the market just reminds investors that investing in stocks and shares does involve some risk and uncertainty. And it’s worth noting that the recent correction in equity markets has only taken them back to roughly where they began the year, after an extremely fast start. More importantly, there are few signs that a major sell-off is likely as the world economy has room to motor ahead.

The pound rallies – what does this mean?

Sterling has rallied since the autumn, which has important implications for many of our large companies. But things aren’t always as they seem, and the pound’s current rise reflects rather more the decline in the US dollar than it does the strength of the UK’s economy. For example, in early November-late January the pound/dollar exchange rate has moved up about 8%. But when we look at the pound against our other major trading partners, it’s actually moved up closer to 4%.

That said, a reassessment of the extent of the slowdown in the UK economy has certainly helped the pound rally, as have reduced concerns over the impact of Brexit and signals from the Bank of England that rates may need to go up again in 2018.

Looking ahead, we believe factors outside the UK will largely drive how the pound performs against other major currencies. Typically when investors are more confident about the world economy, the dollar goes down in value as US investors buy overseas assets. But at the moment, the UK still isn’t quite as attractive a destination for overseas investment as some other markets.

What will follow Trump’s tax cuts?

Following Trump’s large tax cuts there will be a great deal of money in the coffers of US companies. Where that money will be invested is one of the most important questions for the coming year.

At the moment it’s not certain. This is partly because companies which benefit from the tax cuts are still analysing the full impact of the legislation.

Markets would be reassured if most of the money was reinvested in these companies, say in new equipment, as this would lengthen this current growth phase in the economic cycle. But it’s possible that it will be the start of more merger and acquisition activity, as for some firms it’s easier to buy a new factory or distribution system than build one from scratch. Otherwise, cash might be returned to investors as larger dividend payments and share buy backs.

At the moment there’s scope for a wide range of outcomes; careful analysis is needed whether to buy growth stories, merger and acquisitions candidates or income paying companies for example.

Merkel reaches coalition deal with Germany’s Social Democrats

Financial markets have been looking carefully at events in Germany in anticipation of Angela Merkel putting a government in place. In fact the markets had already priced in that the Christian Democratic Union (CDU) and Germany’s Social Democrats (SPD) would form a grand coalition. Now that they’ve successfully struck a deal, it’s expected that Angela Merkel will remain as Chancellor, although there is one final hurdle of a vote within the SPD’s membership which could still hold a surprise.

Nevertheless, divisions within the German Parliament may make it more difficult for Germany to press ahead with important issues such as major changes on immigration or the development of the Eurozone. As a result, tensions will remain in place across the EU.

And there’s no doubt that the delay in reaching agreement on a German government has been one factor in the slow progress towards the next round of Brexit negotiations.

Looking ahead

As we move forward, we expect all stock markets, whether in emerging or developed countries, to have positive growth in 2018, but we don’t expect to see the same level of performance as in 2017. We also expect much more short-term volatility in markets, as recent days have shown. It must be remembered that 2017 was an unusual year for markets. For example the last time the S&P 500 Index in the US increased in value each month over a whole calendar year was back in the early 1950s!

The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in February 2018.