Market Update January 2018
Given the choice between focusing on the negatives (Trump, Korea, China trade war prospects) or taking a ‘reasons to be cheerful’ approach (corporate profitability, improving global growth scenario), financial markets clearly decided on the latter in 2017, making it a good year all round for investors. Funds on Harvest’s Recommended List rose by more than 9% on average (in euro terms) over the year as a whole.
Asset valuations, particularly equities, now look quite stretched and the prospect of 2018 being a repeat of 2017 must be viewed as quite slim. While the traditional enemy of investment markets, inflation, looks to be in long term abeyance, there are plenty of other reasons for concern and we would expect bouts of volatility in financial markets to be a feature this year. And we certainly cannot rule out a major correction although we are attaching a lowish probability to such an event for the moment.
All of the major equity markets performed strongly in 2017 and most produced double digit returns over the year. Once again, China led the way with a massive 43% return and the US was no slouch either returning more than 21% in 2017. Europe at 11% looked relatively pedestrian by comparison. However, currency moves were a very significant factor over the course of the year. As the euro gained against most other currencies, euro based investors suffered a considerable degree of dilution when returns were translated back to euro (see table below). In euro terms, the US returned just 6% while the returns from Japan more than halved from 19% to 8%. Performance data for the major markets is shown below:
2017 2017 (in euro terms)
US +21.1%* +6.4%*
UK +11.9%* +7.7%*
Europe +11.4%* +11.4%*
Japan +19.1%* +8.3%*
Ireland +9.9%* +9.9%*
China +42.9%* +24.6%*
* Source: Financial Express Analytics
Looking out into 2018, we are maintaining our cautious, but not necessarily bearish, view on equities. In terms of new investment in equities, we continue to advise clients to take a phased approach and to lean towards funds with a focus on income. Longer term, we remain most positive on continental Europe and emerging markets. We also added some specialist ETFs and investment trusts to our Recommended List in areas where we see strong long term growth potential such as robotics and biotech.
All investors are aware of the low to zero return from cash deposits, a situation which is unlikely to change for quite a long time to come. In 2017, Harvest launched its Cash Alternative Strategy, an approach which incorporates a range of very low volatility funds offering a return significantly better than cash without involving a high degree of risk. Over 2017, the Cash Alternative Strategy returned 5.1% (at a volatility level of less than 2%). We are strongly of the view that cash rich clients should be looking to switch at least part of their cash holdings into such a strategy.
An upturn in the interest rate cycle is unlikely to be good news for bonds. However, while the US did begin to increase interest rates in 2017, a general round of interest rate increases looks a long way off. That said, we continue to see little value for retail investors in mainstream bond markets. We are continuing to promote exposure to some specialist areas of the bond and credit markets where we still see higher yielding opportunities such as in emerging market bonds and mortgage backed securities.
Property remains one of our favoured asset classes and it is one to which all clients should have a long term exposure in their portfolios. Yields on commercial property are still attractive across most of the developed markets. We favour ungeared or lowly geared pooled investments, particularly those with a visible income stream. Irish residential property is a particular hotspot at the moment, and looks to remain so for at least a couple of years. Harvest plans to bring bespoke opportunities to our clients over the short term offering exposure to this sector.
As mentioned above, euro-based investors did not fully enjoy some of the stellar returns delivered by world equity markets in 2017 as a consequence of the strong euro. Currencies have probably found their level over the very short term although looking into 2018 a recovery in the dollar looks quite likely. Brexit will probably ensure that a sustained recovery in Sterling does not happen for quite some time yet.
Gold and Oil
For the twelve months of 2017 gold prices rose by double digits in dollar terms but again suffered from currency moves and was down 2% when converted to euros. Further uncertainty this year is likely to be good news for gold and we may even see a partial reversal in the recent dollar/euro trend in 2018. We would reiterate our view that a small exposure to gold in your portfolio is worth considering. Oil markets have recovered over recent months and a barrel of oil is now trading at $66, up by more than 15% since the beginning of 2017. We see little prospect of a sustained recovery in the near future although rising tensions in the Middle East could certainly counter that.
* Source: Financial Express Analytics
Inflation has not been a factor in markets for quite some time and 2018 is shaping up to be no different. However, experience has taught us that when inflation does reemerge it could do so with surprising strength.
As always, you should only consider the investment views contained in this update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact us on 01 2375500 or email email@example.com.