Sunday 16 December 2018

'Goldilocks' year for investors but plenty of food for thought in 2018

Trump and Italy election to be closely watched

Glanbia, led by Siobhán Talbot, looks likely to be one of the Irish beneficiaries of Trump tax cuts.
Glanbia, led by Siobhán Talbot, looks likely to be one of the Irish beneficiaries of Trump tax cuts.

David Holohan

Investors have experienced a very strong year during 2017. Global stock market indices performed extremely well, generating gains in excess of 20pc in the US and more than a 10pc increase across Europe.

The past year can be best characterised as a 'Goldilocks' environment for stock market participants; whereby global growth is the strongest in several years, monetary policy remains loose, keeping interest rates low and corporate earnings have continued to move higher.

Politically, the anticipated fallout from the election of Donald Trump did not materialise and if anything, his inability to pass meaningful legislation for most of the year resulted in limited political interference for the US economy.

In Europe, while there were several elections that showed further gains for far-right political parties, equity markets shrugged off the results as the perception remains that the European Union will continue to stumble through any setbacks rather than break up, which had been a distinct concern several years ago.

For the UK, it was very much an annus horribilis. Politically, Prime Minister Teresa May continues to struggle to rein in her own cabinet, let alone make meaningful progress towards Brexit, which is quickly approaching the one year countdown point. The UK government also has to deal with a slowing economy and higher inflation.

Looking towards 2018, many of the economic themes present for the past 12 months are likely to continue for the next six months. Global growth indicators suggest that both developed and emerging markets will continue to expand at a healthy rate, albeit growth rates can be expected to start to decline in the second half of the year.

President Trump's recently passed tax bill will provide a boost to corporate earnings both for US companies and international businesses that have significant exposure to the US economy.

From an Irish standpoint, companies such as CRH, Kerry Group and Glanbia stand to be beneficiaries of the corporate tax rate reductions.

From a political standpoint, 2018 looks set to be a very interesting year, particularly across Europe.

The recent Catalan vote is a major embarrassment for Spanish Prime Minister Mariano Rajoy and it remains to be seen what the impact will be in the year ahead.

The upcoming Italian general election looks set to be an explosive contest, which given the level of dissatisfaction with the EU in the country, stands to make the result the most-watched political event of the year.

In the US, it remains to be seen at what point investors become more concerned by the Trump administration as rumours abound of several imminent departures at cabinet level.

For equity investors, the highs for the year may be come early in 2018 as stock markets have already priced in the Trump tax cuts. The technology companies that propelled markets higher in 2017 are unlikely to do so again and the cryptocurrency craze is likely to implode.

Finally, investors should prepare for the end of ultra-low interest rates, which has been a key support of the multi-year rally in equities.

David Holohan is chief investment officer at Merrion Private

Irish Independent

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