This year began with markets buoyed by the major surprise of President Donald Trump’s election. Trump’s impact was felt immediately; a serious geopolitical conflict with North Korea and the dysfunction of American policymaking. Add to that the tortuous Brexit process, in hindsight global equities in 2017 performed remarkably consistently.
By country, the heavy lifting has been done by Brazilian and Indian shares
Although intermittent storms along the way seemed important at the time, looking back with hindsight at global equity indexes shows more or less steady progress throughout the year. Currently the MSCI World Index is up 16%. Most of the major markets have contributed: in local currency terms, the S&P 500 in the US is up 19.5%, and the Nikkei in Japan up 18%.
In Europe the apparent rise is smaller, a 7% rise in the FTSE Eurofirst300 Index, but that was on top of a strong rise in the euro against the US dollar. Even the UK has managed to claw back previous Brexit-related share and exchange-rate losses, with the FTSE 100 Index up 4.9% and the pound up 8.3% against the US dollar, as some progress has been made in its difficult Brexit negotiations.
There have been even stronger performances from the emerging markets, where the MSCI Emerging Markets Index is up by 24.6% in the emerging-markets’ currencies and by 29.7% in US dollar terms. By region, Asia was strongest up 30.4%. By country, the heavy lifting has been done by Brazilian and Indian shares, with a smaller contribution from China, but little change in Russia.
International Equities — Outlook
The strength of world equities has some solid backing from the economic fundamentals. In the US the economy continues to do well, the much-awaited tax cuts finally look likely to kick in, and the global economy has been strengthening.
In the US, the key indicator of progress is the monthly jobs numbers, and they continue to meet or exceed expectations: There were 228,000 extra jobs in November, more than the 190,000 expected, and the unemployment rate stayed at a low 4.1%.
And, after a very rough passage through Congress, the Republicans’ tax cut package was, at time of writing, very close to being voted through. It has been helpful that the latest Fed increase in interest rates and its prospective schedule of further rises have been and gone without upsetting investor sentiment.
A “policy mistake” by one of the big central banks has been one of the key risks fund managers have talked about as a potential disruptor of strong equity markets. Good economic conditions have translated into good profit outcomes: According to US data company FactSet, corporate profits for the S&P 500 companies will have risen by 9.5% this year.
While the number is exaggerated by a huge turnaround in US energy companies’ profits, and some sectors missed out, there were large increases in some sectors; materials, information technology.
Outside the US, the world economy also remains in good shape. The JPMorgan Global Manufacturing and Services Index, which aggregates a wide range of national indexes found that “November saw the rate of expansion in global economic output remain at its joint-highest over the past two and a half years.
The outlook also remained positive, with new business intakes rising at the strongest pace since September 2014 and backlogs of work increasing to the greatest extent in four years.” The same information sliced by sector showed that all eight high-level sectors were growing in November, led by technology, and, remarkably, all 23 more detailed sub-sectors were also growing. There is clearly a broadly based momentum to the current world economy.
Investors who backed the current synchronised global business cycle have been richly rewarded, and the current outlook suggests the cycle has further to run. Even so, the warnings are still worth repeating. The recent monthly surveys of fund managers run by Bank of America Merrill Lynch, for example, have revealed that the big fund managers, while on board with the view that the global economy is likely to keep on doing well, are also convinced that equities, especially in the US, are expensive, even allowing for the good outlook.
Investors no longer see much of a threat from Kim Jong-un, or indeed from anyone or anything else. So far, the optimists have had the best of it, and investors will be hoping that 2018 will bring more of the same.
It could well do, but investors should be aware that, in the US, they are buying into assets which are expensive this late in the current US business cycle, that the tide of monetary policy liquidity that has supported equity prices everywhere is starting to go out, and that the true level of geopolitical and other risk is actually higher than is currently allowed for in asset valuations.
