Markets see in 2018 with a bang
Strong economic data helped ebullient investors push equity markets to new records in the first week of the year
2 min read
2018 begins on a strong footing for investors
The investment year got off to a strong start this week with a batch of positive economic numbers. This supports our positive view of global economic growth and our preference for ‘risk assets’, such as equities and corporate bonds.
Manufacturing data from the US and Europe pointed to continued growth, with figures from Europe at record highs. In the UK, productivity growth was at its highest for six years and December Purchasing Managers’ Index (PMI - a measure of economic strength) showed 54.2, compared to 53.8 implying an improving outlook for British companies.
We have favoured European equities for some time, and the strength of European markets has seen these holdings benefit. Within the UK, our bias to quality companies with an overseas focus should also benefit from the increase in activity signalled by the strong PMI numbers.
There were some disappointments. UK construction slowed, reflecting concerns around the consequences of Brexit in the sector, while US jobs data pointed to a softer than anticipated end to 2017.
Overall, however, signs point to a strong global economy. Later in the year we may see the cycle begin to turn and we are monitoring data for any signs of slowing growth.
Markets ring to familiar sound of breaking records
Strong economic data encouraged investors to return enthusiastically to the markets after the holiday season, contributing to performance of Coutts portfolios thanks to our continued preference for equities.
This has been one of the strongest starts to the year for some time. The Dow Jones topped 25,000 on Thursday, while the FTSE 100 closed at another new record high on Friday. In Japan, the Nikkei average also closed on another 26 year-high.
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We see global economic growth continuing to support equity markets. Although some sectors are highly valued, there is still value to be found. We continue to see value in Europe and Japan, where economic growth is improving and corporate earnings are rising ahead of other regions. While the US market is highly valued, we still see opportunities in financials – one of our strongest areas of confidence in the US - and technology.
Emerging markets show no signs of retreat
Our emerging market equity exposure continued to benefit from strong growth in the sector. After rising by more than 30% in 2017, the dawn of 2018 saw no slow down, with the MSCI Emerging Markets Index up 3.75% in the first week.
Our emerging market bond exposure also gained ground, as dollar weakness saw emerging market currencies gain ground. Yields on EM debt fell by 15 basis points as bond prices rose.
Emerging market equities remain good value in comparison to developed markets in our view and we are maintaining our levels of exposure, although the sector can be subject to high volatility. This year sees elections in a number of key emerging markets – such as Russia, Brazil and Mexico – which may have an impact on returns.
Despite the potential for political disruption we think attractive valuations and dollar weakness will continue to fuel returns.
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