Global growth gathers pace in Q4
2017 ended very well for equities
3 min read
A positive outlook for equities and forecasts of further economic growth bring a bright end to 2017.
Synchronised global economic growth continued to strengthen over the fourth quarter of 2017 and the outlook remains bright. The International Monetary Fund’s latest forecast predicted that world GDP would rise by 3.7% in 2018, driven by increasing levels of trade, investment and consumer confidence.
Equities around the world benefited from the supportive economic environment, with the US stock market performing particularly well thanks to strong corporate earnings. Leading indices including the FTSE 100, Dow Jones Industrial Average and S&P 500 reached record levels, while Japan’s Nikkei 225 reached a 25-year high.
Meanwhile, gilt yields fell and prices rose towards the end of the quarter partly due to Brexit negotiations and the associated economic uncertainty.
There was progress on Brexit though. In December, Prime Minister Theresa May struck a deal with the European Union (EU) to move talks on to the second phase. There will be no hard border with Ireland and the rights of EU citizens in the UK and UK citizens in the EU will be protected.
The Bank of England (BoE) raised interest rates from 0.25% to 0.5% in November, its first rate rise in a decade. The Consumer Prices Index rose by 3.1% in the same month – its highest rise in nearly six years. The BoE said it was relaxed about the rise and maintained its stance that inflation is peaking and will trend downwards over the course of 2018.
Further good news for the UK economy came with the country’s Purchasing Managers’ Index rising to a four-year high in November as manufacturing activity increased.
The US Federal Reserve raised interest rates in December to a range of 1.25% to 1.5%, the third rate rise of 2017. The central bank said the increase was due to solid gains in the economy and boosted its GDP growth forecast for 2018 to 2.5%. Meanwhile, the Senate approved plans for the biggest overhaul of the US tax system in 30 years, marking a victory for President Trump. The changes include tax cuts for corporations and middle income earners.
Japan and Europe still strong for equities
We maintain our view that Japanese and European equities offer relatively attractive valuations and strong earnings growth.
The European Central Bank (ECB) upgraded its economic growth forecast for the eurozone from 2.2% to 2.4% in 2017 and from 1.8% to 2.3% in 2018 as the region continued to recover. Policymakers confirmed the ECB’s asset purchase programme would drop from €60bn to €30bn a month at the start of 2018 through to at least September.
Japanese Prime Minister Shinzo Abe’s gamble in calling a snap general election paid off as his ruling Liberal Democratic Party (LDP) claimed a decisive victory in October. We believe the “three arrows” of Abenomics – monetary easing, fiscal stimulus and structural reforms – will continue to drive economic growth and provide a supportive environment for the country’s stock market.
We remain underweight government bonds due to rising interest rates and inflation, preferring investment grade and high yield corporate bonds as well as emerging market debt. We are modestly underweight commodities and see limited upside for gold in a rising interest rate environment. We remain broadly neutral on oil due to oversupply concerns.
While the global economy continues to strengthen, risks remain. Brexit negotiations may continue to cause short-term market volatility and, following Germany’s election, coalition talks collapsed between Chancellor Angela Merkel’s Christian Democrats, the Greens and the liberal Free Democrats.
The International Monetary Fund has also expressed concerns about the risks of rising debt in China, although we believe that China has the resources to deal with its debt issues as it works towards rebalancing its economy. We are broadly positive on the country’s prospects and see no reason to change our view.
Synchronised global growth created a supportive economic environment which benefited equities around the world in the fourth quarter of 2017. At Coutts, our positions in Japanese and emerging market equities were particularly strong contributors to performance, with our tactical positions in Europe and global technology also doing well.
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