Market Outlook Report – January 2018

Market Overview

January 2018

London’s stock markets finished the trading year in style, shrugging off jitters over Brexit to bow out at record highs.  The FTSE 100 index capped the year with its 24th record close, up 64.89 points, or 0.85 per cent, at 7,687.77 (up 7.6 per cent on the year), while the more domestically focused FTSE 250 also hit a new peak, rising 83.95 points, or 0.41 per cent, to 20,726.26.  The pound appreciated against the dollar by about 10 per cent during the year, its strongest performance since 2009.

Asian markets largely disregarded the US president’s sabre-rattling over North Korea and threats of trade wars and focused instead on strong demand for technology stocks.  The Hang Seng index in Hong Kong leapt by 36 per cent and the Nikkei 225 in Japan recorded its sixth successive annual rise to complete a 2017 gain of 19.1 per cent, closing the year at 22,764.94.

China’s stronger-than-expected performance during 2017 has confounded those who predicted a “hard landing” for the engine room of the global economy.  It has led to stronger demand for commodities such as copper — a fairly reliable proxy investment for global growth, because of its use in products such as electrical wire.  The 4.9% rise in the FTSE 100 in December was driven by the copper price hitting a four-year high, which pumped up mining stocks.  The final half-day of trading in December highlighted one of the themes of the year — soaring mining stocks.

The CAC 40 in France, up 9.3 per cent, and the Dax in Germany, 12.5 per cent higher, both outperformed the FTSE 100.  The FTSE All-World index, an important global benchmark, jumped 22% over the past 12 months — its biggest increase since 2009.

Over the past year, our model investment portfolios have benefitted from our diversified, strategically proportioned exposure to selected global markets, producing significant returns for our clients.  Below, we outline our expectations for Global markets in 2018.

Expectations for Global Markets in 2018

2018 looks likely to be a good year for the global economy.  Forecasters are betting that the strongest global growth in years will add extra fuel to the lengthy bull market, despite the gradual withdrawal of stimulus by leading central banks.  In the UK that will help to moderate the current consumer and investment squeeze related to Brexit and keep our economy growing.  In other major economies we are likely to see much stronger growth rates.

But can this period of healthy global growth be sustained?  The IMF is forecasting a continuation of 3.7 to 3.8 per cent global economic growth until 2022.  That would take the current economic upswing, which started in 2009, to at least 13 years: not inconceivable but not guaranteed either.  Since the Second World War global upswings have lasted between 25 years, from the late 1940s until 1973, and five years (in the late 1970s).  The 1980s economic expansion lasted for nine years and the global recovery, which started in 1993, continued until 2007, a total of 15 years.

Reeves Model Investment Portfolios

As reflected in the graph below, all of our model investment portfolios have performed better than the FTSE All-Share Index benchmark during January.  Each model portfolio has performed as one would expect, reflecting the inherent risk-reward trade-off associated with different risk profiles; i.e. the higher risk portfolios have performed better in the ongoing bull market.

The proactive management of our clients’ pension investment funds is a crucial part of our service and the level of resources we devote to this area is rare, if not unique, within the UK IFA market.  The Reeves Investment Team meeting this month reflected on the various market predictions for 2018.  Predominantly, forecasters are betting that the strongest global growth in years will add extra fuel to the lengthy bull market.  2018 is expected to be the best year for growth since 2011, despite the gradual withdrawal of stimulus by leading central banks.

In a recent poll of investment trust managers, Europe and emerging markets were the two regions tipped to produce the best returns in 2018.  In the poll, conducted by the AIC, the trade body for investment trusts, 30 per cent of managers chose Europe as their preferred region, while 23 per cent picked emerging markets.  Whilst our current model investment portfolios already have a proportionate exposure to Europe, we have been underweight in Emerging Markets and this is something that we had previously identified and have now addressed as part of the strategic portfolio changes made during this month’s Reeves Investment Team meeting.  It is worth highlighting that the one existing merging markets fund we had already incorporated in our model investment portfolios (Blackrock Frontiers Investment Trust PLC) was the best performing fund in its sector (up 26.3% over the past year and 11.6% over the past month alone).

As well as increasing our exposure to emerging markets & Europe, we have reduced our cash balance and sold our direct exposure to the oil market (selling the ETFS Brent Oil 1 month ETC), taking gains from the recent oil price recovery.  We have also sold the Target Healthcare REIT Limited, after losing patience with its consistently poor performance.  Other portfolio adjustments include strengthening our exposure to the European market increased holdings in our selected European funds.  As a counter-risk measure, we have also increased our holding in the Investec Cautious Managed fund and our exposure to Gold via the ETFS Physical Gold fund (interestingly, speculative Bitcoin investors have been seeking refuge in gold after Bitcoin’s 40 per cent collapse over the past month raised questions over its future and that of other virtual currencies).  Clearly, gold remains the first instinctive port of call as a safe haven whenever market sentiment turns negative.  We therefore wish to retain a core holding in Gold as a contingency measure, should global equity markets take a sudden and unexpected downturn.

Therefore on balance, we remain optimistic about the prospects for global markets in 2018.  Nevertheless, we are conscious of the inherent risk of a sudden market correction, which some commentators suggest may happen sooner rather than later.  For this reason, we have retained a proportion exposure to cautious funds, gold & cash, to mitigate this risk.  We believe this is a sensible and prudent approach to pursuing positive returns for our clients, without exposing valuable pension funds to disproportionate or extreme risk.

Email communications will be going out shortly to those clients whose investment portfolios are affected by the recent strategic changes.  These latest adjustments are aimed at continuing to deliver positive investment returns through 2018 and beyond.