Predictions are a mugs game, or so the saying goes. But investment inherently requires some broad estimate of what the future world may look like.
Widespread scepticism about asset valuations and the durability of Trump trades gave 2016's crop of year-ahead predictions a bearish edge. Perhaps chastened by the strength of the global recovery, this year's batch are arguably more measured.
Read on for nine fund manager's views on what you should watch out for in the year to come.
Alan Custis, manager of the Lazard UK Omega Fund
The resilience of UK consumers in 2018 will be an important determinant of the UK’s economic prospects, and will likely have implications for domestically oriented stocks.
While the outlook for the UK economy is uncertain, opportunities have been created.
The UK equities market, offers good value on an absolute and relative basis, particularly among large-cap stocks.
The UK’s FTSE 100 index is an internationally oriented market and given its large weighting to oil and mining, sectors that are tied to global economic prospects, is influenced less by domestic factors.
Here the signs are good, as the global economic recovery continues to gather pace and has the potential to trigger an investment cycle and boost mergers and acquisitions activity.
In such an environment, we think internationally focused UK stocks would continue to prosper.
Robert Horrosck, manager of Matthews Asia Asia ex Japan Dividend
The best first guess about what will happen next year is always more of the same. That is to say, follow the current trends. So it might be tempting to say that the forecast for 2018 looks like this:
The U.S. stock market will continue to power up on expanding margins as wage pressures fail to materialize—even as the U.S. Federal Reserve continues to raise rates; global growth will continue to strengthen.
Europe will see strong earnings growth as the European Central Bank (ECB) takes a more cautious course than the US Federal Reserve (Fed), but political woes and secessionism continue.
China and Japan will continue their reflationary policies, leading to a continuation of strong earnings growth and the bull markets in their equities—although performance will continue to be focused in just a few mega-cap, high-growth stocks; investor flows into emerging markets will continue to focus on passive ETFs, pushing these mega-cap stocks ever higher.
Association of Southeast Asian Nations (ASEAN) governments will continue to flinch on monetary and fiscal stimulus and their economies will underperform as a result; consumer spending across the region will continue to be strong.
Bitcoin will push on through US$20,000, US$30,000, US$50,000 as pundits find ever more sophisticated ways to conjure up an intrinsic value for it and even as cryptocurrencies proliferate and corporations figure out that they can raise money by issuing a "currency" rather than equity..
David Coombs, manager of the Rathbone multi-asset portfolio funds
The latest Budget showed just how hamstrung this government is. Chancellor Philip Hammond presided over an underwhelming affair. It would appear that money was too tight for any meaningful fiscal boost or spark of vision.
The fragility of this government means there is a real threat that it could collapse, opening the way for Jeremy Corbyn’s Labour to take power in an early general election.
The chances of this seem slim, but the potential effects are worrisome enough to keep this risk high up in investors’ minds. A failure over the Brexit negotiations seems the most likely spark for this tinderbox.
If Mr Corbyn were to become prime minister, we believe gilt yields would rise and sterling would fall dramatically as foreign investors may abandon UK assets wholesale.
Domestic equities would be hit hard, both by rising import costs and a fall in businesses’ appetite to invest (hitting economic growth).
The ultimate result could be stagflation. If an election were called, we would avoid UK assets with extreme prejudice.
European inflation appears likely to remain muted. Growth has probably peaked – at 2.5%, relatively low for a region heavily tied to global commerce – and there’re still plenty of unemployed in the bloc.
For us to change our view on the continent, we would need to see: a reacceleration in global growth; a sustained increase in bund yields; better prospects for the financial and consumer discretionary sectors; a global adjustment where value companies outperform growth.'
James Bateman, CIO, multi asset, Fidelity International
What happens when central banks step back is the big question for 2018.
There are some who believe that the impact will be limited, with investor demand sufficient to make up the shortfall.
The risk is that investors panic, either because they fear interest rates are going higher than expected, or simply because central banks are no longer around to underpin risk assets.
At the very least, the end of quantitative easing is likely to test the ‘buy-the-dip’ mentality - particularly in fixed income markets like US investment grade bonds.
Are worries misplaced? Central banks could simply step back in, with Mario Draghi promising to do so if needed. This assumes, however, that monetary policy remains unconstrained by inflation, which has lain dormant since the financial crisis.
Indeed, it’s only eighteen months since we saw peak deflation fears, with 10 year German yields reaching -0.3% and a third of all government bonds globally trading at negative yields.
The potential for regime shift should not be dismissed lightly.
Michael J. Kelly, global head of multi-asset at PineBridge Investments
The reflationary regime is unfolding as we have expected: a reflation of confidence, followed by growth, investment, and, finally, inflation with the removal of stimulus. While nearly all assets look expensive when looking at current cash flow, some will be able to grow these cash flows into today’s prices and beyond.
We favor growth assets – asset classes like equities, developmental real estate, and timber – whose cash flows will be enhanced by the accelerating global economy. We see two sectors that are particularly strong beneficiaries of reflation: financials and technology, and we also like small-cap and value stocks.
Expectations are also ripe for disruption. Today’s consensus believes that China is about to experience a big slowdown. Not us.
Most analysts believe that we are late in the global business cycle. We instead see many classic early-cycle characteristics.
Finally, consensus would tell you that while active management may be poised to outperform, it’s too expensive and will be crowed out in portfolios by stepped up investments in private assets. We disagree.'
Giles Parkinson, global equities fund manager at Aviva Investors
Tax selling – where an investor sells a losing stock in order to offset the capital gains from their winners – is a recognised factor in US markets at this time of year.
This phenomenon tends to push stocks already down year-to-date even further. But I suspect that it is playing a larger-than-normal role in 2017 as Congress debates tax reform.
Most stocks are up this year, but some potential sellers are holding off from realising their capital gains in the hope of paying a lower tax rate in future; meanwhile, some owners of losing stocks have become more eager to harvest the capital loss before Christmas.
This way of thinking is impossible to measure, but if it is widespread then it implies that some of the momentum behind the current equity melt up could reverse in the New Year.
Ritu Vohora, equities investment director at M&G
US economic momentum is still solid and corporate profits are on a sustainable growth path. The recent earnings season revealed that company profits are still exceeding analysts' estimates with technology showing particularly strong earnings growth.
However, investors are right to be asking whether valuations look stretched - with the US equity market, at the aggregate level, trading on valuation levels not seen for nearly 20 years since the tech bubble.
A lot of the rise we have seen has been driven by multiple expansion, rather than earnings growth – which begs the question of its sustainability. There are also other anecdotal warnings signs – M&A is at high levels, headline unemployment is low and interest rates are rising.'
Furthermore, following a long period of underinvestment in traditional capital equipment since the global financial crisis, US corporates are beginning to increase spending again on capacity which will fuel growth. Most macro indicators continue to be very strong.
On top of this, there is the wild card of political stimulus.
David Millar, head of multi asset at Invesco Perpetual
Despite what has been an incredibly tumultuous, unpredictable and at times unimaginable period for global politics and an initially spluttering return to global growth, central banks appear to have successfully steered markets through the worst, ironing out the kinks and at times acting together to present a semblance of global harmony.
Sometimes, markets have appeared to simply ignore events that in less interesting times would have caused a rout.
Somehow though, it still doesn’t feel that the aftermath of the financial crisis is fully behind us, nearly 10 years on, and we believe it is vital to consider both cyclical and structural forces in building our economic and market outlook.
Steve Davies, manager of the Jupiter UK Growth Fund and Jupiter UK Growth Investment Trust
The range of outcomes for the UK stock market in 2018 is unusually broad and highly dependent on the rate of progress of the Brexit talks.
At one end of the spectrum, if a transition agreement can be secured early in 2018, as now looks increasingly likely in my view, then the pound should rally, economic growth should pick up as inflation subsides (thus enhancing consumers’ spending power) and business confidence should improve.
Paradoxically, the FTSE 100 Index may struggle to make any progress in these circumstances, as many of its constituents are global businesses whose earnings would be hit by the rise in sterling.
On the flip side, any company exposed to the UK domestic economy (such as banks, retailers, housebuilders, travel companies etc) could be re-rated by up to 30%, in my opinion.