Rebecca O’Connor, Tom Sieber and Rosie Murray-West provide you with their market predictions for the year ahead.
This year, I’ll be looking mostly at “three I’s”: Inflation, Innovation and Impact – the first two will frame investors’ day-to-day thinking and the third will become increasingly interesting to those taking a long term view.
Inflation: We’ve been living with rising inflation since around the time of the Brexit vote. “Brexflation” looks set to stay, despite an increase in interest rates (see more on rates below), as the drivers behind it are the weaker Pound and the rising cost of imports. So beating inflation in what is still a low interest rate environment will remain challenging, particularly for more risk averse investors who prefer to keep a high proportion in cash and property. The trend of moving up the risk curve to get a return above inflation is likely to continue.
Innovation: It’s a buzz word for Chancellors in Budget speeches, but this year, firms on the forefront of fintech, AI and big data, helped along by government policy, will be shaping the world we live in and also the outlook for investors. The recent performance of funds with a technology focus, such as Henderson Global Technology and Axa Framlington Global Technology, which have returned more than 30 per cent in the last year and as much as 180 per cent in the last five years, demonstrates the potential. With a global race between countries to be world leaders in these emerging fields, rapid innovation is likely to continue to drive returns for investors in the next 12 months. However, with so much money being ploughed into the sector, and with so many companies in the field at an early stage, the risks of some big losses are relatively high, too.
Impact: Impact investing, which involves investing in themes that have a positive impact on the environment and society, is enjoying a rise in popularity. Assets under management in this area in the UK rose by 11 per cent in the six months to November, according to 3D Investing, the research firm, boosted by the growth of ‘megatrends’, such as renewable energy and electric vehicles. Falling costs of new technology, together with global regulations on carbon emissions and climate policies will support this shift towards making a profit and a difference.
Recent gains will slow as monetary policy tightens - would expect FTSE 100 to reach 7,800 by second half then not rise significantly beyond that.
FTSE 100 Stock prediction: Berkeley Group, the housebuilder, is difficult to argue against and it is set to do well from the Government’s pledge to build 300,000 new homes a year.
While the potential for rising interest rates in 2018 may curb the enthusiasm of some homebuyers, Berkeley Group’s strategy of buying well-located sites and building quality homes that people want to live in, sustainably, helps the company maintain its steady, long-term performance. It takes its responsibility to the environment and society seriously, too.
My recommendation for 2018 would be the WHEB Sustainability Fund. It invests in the environmental, global “mega trend” stocks, which are powering energy efficiency, electric vehicles, components for renewable energy and tech advances in resource management. It’s a small company, but totally unique in the way it reports – it’s as interested in the carbon dioxide emissions (and there’s a calculator on the site to let you work out how much carbon your investment has saved) that it reduces as returns and recognises that increasingly, the two go hand in hand. WHEB is at the vanguard of the trend towards impact investing and has an expert term.
More than 18 months on from the vote to leave the European Union, the markets will begin 2018 with continuing focus on the Brexit process. A divorce settlement has been agreed in principle, but the focus now is on securing a transition agreement which can lend some certainty to the business community while the details of the future trading relationship between the UK and EU is ironed out. A deal here would likely boost sterling as well as domestic-focused names in the housebuilding, leisure, retail and financial sectors. In this scenario, the FTSE 250 could outperform the FTSE 100 given the latter’s bias towards overseas earnings.
An embarrassing House of Commons defeat for Prime Minister Theresa May in a key Brexit vote in December 2017 was the latest demonstration the complications involved in the process and this may help explain why UK shares have underperformed those in most other developed countries in 2017. Progress towards an orderly exit for the UK could help reverse this trend in 2018 – although a key risk for investors in sectors such as utilities and transportation to watch is improved electoral fortunes for the Labour party given its re-nationalisation policies. Investors will get some insight into the prospect of Labour putting these plans into action with May’s local elections.
A theme which has moved into the mainstream in 2017 and should continue to gain traction in 2018 is electric vehicles as they move closer to becoming a mass-market product.
Engineers, miners, micro-chip manufacturers and chemical companies with products and materials relevant to this nascent market could benefit. However, the main operator in this industry, US-listed Tesla, could face scrutiny over its demanding valuation and the rate at which it is burning through cash.
The Eurozone economy has enjoyed a storming 2017 and with the prospects for 2018 also looking bright investors could consider gaining diversified exposure to stocks in Continental Europe through a low-cost exchange traded fund like Vanguard FTSE Developed Europe ex UK (VERX).
What goes down, must come up, and that’s certainly the case with interest rates. The only question is when. The Bank of England’s November rate rise was the first in a decade, and there will be more to follow.
The inflation rate is the key indicator to watch when we are trying to work out when those rises might occur. It’s currently above its target, at 3.1 per cent, and although that is expected to fall back, ONS figures show that rising raw material prices may keep it higher than expected. This is likely to test the Bank of England’s tolerance for keeping rates low while prices rise, so investors should be prepared for further hikes if inflation does not settle down.
There is already plenty of evidence that 2018 will be a year of uncertainty. From Brexit-related discussions in the UK to political crisis in Germany, Europe is already facing challenges, and that’s before a springtime election in Italy. The geopolitical situation also remains fragile, particularly in North Korea, while the potential for Donald Trump to throw more spanners into already febrile situations should not be underestimated. After a good year for the markets, political volatility may well take its toll on markets that are trading at relatively high levels, so investors should be prepared for a rollercoaster ride.
If Trump gets his way, the US stock market could be about to get a boost. A cut in corporation tax from 35 per cent to 20 per cent would boost earnings, particularly for US domestically focused businesses.
As I write, the corporation tax rate is still undecided, and may end up higher than 20 per cent, although there is likely to be some form of a cut. If this happens, the US market may continue to rise, with investors taking note of higher earnings to attribute higher valuations to the stocks.
Goldman Sachs calls this possible effect ‘rational exuberance’ (as opposed to the famous ‘irrational exuberance’ exhibited during the 1990s dotcom bubble according to then Fed Chair Alan Greenspan.) Investors should watch the tax bill carefully and take note of which sectors will be most affected.
Although some bullish experts are predicting an assault on the 8000 mark, I think uncertainty will keep the FTSE below this point. The FTSE remains incredibly hard to call, given the Brexit negotiations, but its global nature should protect it.
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