The last year has been characterised by ongoing and significant political volatility on the one hand and markets soaring to all time highs on the other, with seemingly little relationship between the two; in the meantime Bitcoin has provided the roller coaster ride.

 

DIY Investor’s Steve Haysom takes a look back at a year that has on occasion defied logical explanation, and wrangles with the even more knotty issue of what 2018 could bring.

 

Like many, at DIY Investor we expected the seismic political events that so dominated the news to have a meaningful impact on sentiment and market movements; in the event, whilst most of 2017’s political episodes did have some, short-term, impact on performance and volatility, none were sufficient to derail markets as global economies generally improved and earnings picked up.

Much was made of the populist sentiment that was ‘blamed’ for fuelling the UK’s vote to exit the European Union and the election of Donald Trump in 2016, and elections in the Netherlands, France, Germany and the UK all showed the tell-tale signs of the self-proclaimed political elite being delivered of a bloody nose.

One of the first of many flashpoints was anticipated in March as the Netherlands went to the polls, but the incumbent centre-right VVD party was ultimately able to beat the populist anti-immigration candidate Geert Wilders.

Many commentators believed that the election of far-right candidate Marine le Pen by a disgruntled populace seeking new choices would lead to ‘Frexit’ and a subsequent domino effect of countries clamouring for their own version of ‘(insert prefix)exit’, thereby sounding the death knell for the EU.

‘Ils ne regrettent rein’ and all that.

‘‘Ils ne regrettent rein’ and all that.’

The widely tipped Republican Party were duly pushed down into third place and François Hollande’s Socialists fifth heralding a final contest  between former economy minister Emmanuel Macron and Mme Le Pen; however, M Macron won comfortably in early May, becoming  France’s youngest ruler since Napoleon.

On this side of La Manche, Theresa May showed extremely poor judgement in going to the country in June, and following a chaotic and lacklustre election campaign, the Tories coughed up its majority; seeking a stronger mandate for Brexit negotiations, the nation voted along traditional lines of public services and taxation and having shelled out £1bn to secure the support of the DUP, the party has struggled to regain momentum/credibility/gravitas ever since.

In Germany, Angela Merkel won a fourth term as Chancellor in September but the hard-right Alternative for Germany (AfD) became the third-largest group in the national parliament as populist voters delivered yet another blow to traditional parties; a backlash in no small part to Frau Merkel’s deeply unpopular open door immigration policy, but apparently no impediment to her impending betrothal to Prince Harry (please check this…………….Ed).

More recent events in Spain show the depth of feeling around Catalan independence, and in the news over the last few days the increasingly violent protests in Tehran have shown the hugely damaging impact of political bullying on the global stage.

‘apparently no impediment to (Mrs Merkel’s) impending betrothal to Prince Harry (please check this…………….Ed)’

Brexit will be hard, soft or somewhere in between, and there is a growing and increasingly vocal lobby for a re-run of the referendum, or at the very least a vote on the proposed final deal; one thing for sure is that with parties divided and the Tories shedding Cabinet ministers at a rate of knots due to various scandals, the debate can be expected to rumble on for months and possibly years to come.

Mrs May will no doubt wish that Brexit negotiations could have been conducted without the merest reference to Julia Hartley-Brewer’s knee or Damian Green’s hard drive, but her announcement that there are at least grounds to move to the next stage of negotiations will be seen by many as the end of the beginning; certainly markets appeared relieved that the prospect of the UK crashing out without a deal had subsided.

Mr Trump’s presidency was never going to be uneventful and the US has dominated the news agenda, with his first year in the White House full of the ‘fire and fury’ he threatened to rain down on North Korea; nuclear sabre-rattling understandably makes the world vary uneasy, but there is no sense that this President is about to launch a charm offensive any time soon.

However, despite all of the uncertainty and potential dangers that we are traditionally told spooks markets, economies around the world have continued to grow throughout 2017 and now look to be in their best shape since the financial crisis; growth is slow but steady and inflation broadly in check, albeit that the weakness of sterling post the vote to Brexit makes the UK economy something of the exception that proves the rule.

Equity markets have continued to climb long after the ‘Trump bump’ had been expected to flatten out and improving earnings have given the surging market a solid foundation; volatility remained at record lows for much of 2017, with none of the major political events significant enough to cause a sustained spike in either direction.

With an uneasy calm and a realisation that in many regards we are sailing into uncharted waters, events in 2018 become all the more difficult to predict; whilst some warn of a sizeable and imminent correction, markets traditionally perform well in the early stages of the new trading year, so current high valuations should be sustained pro tem.

If low inflation can be maintained the other key component of what is sometimes termed a ‘Goldilocks economy’ is the ‘slow and steady growth’ part, with the key question being ‘what is making up that growth and how long can it last?’; this is likely to dominate sentiment into 2018.

Central banks have made tentative steps towards policy ‘normalisation’, with the US Federal Reserve announcing how it will taper quantitative easing (QE) and the Bank of England pushing through its first interest rate rise in a decade.

It is a moot point as to whether the BoE decision to raise rates to 0.5% following a decade at 0.25% is the first of a series of sustained rises or a one-off, but there seems little urgency to repeat the exercise with most commentators expecting the current level to be maintained well into 2018.

Markets have become accustomed to the safety net that QE has provided, but overall policy is likely to remain supportive and there will no rush to extract the £445bn that the Treasury has pumped into gilts and corporate bonds since March 2009.

In the States, Jerome Powell will take the reins at the Fed, but despite the fact that he is likely to want to make his mark, there is not likely to be any great deviation from incumbent Janet Yellen’s policy for an orderly exit from QE.

A mishandled withdrawal is just one of the factors that could deliver a dreaded ‘cygne noir’ event  in 2018; some will be watching inflation closely to ensure there is no sudden or uncontrollable hike, and others will have a wary eye on China, but overall I see nothing to suggest an imminent crash.

Although well valued with global markets up 20% in 2017, equities look to have some way to go, with some commentators predicting the FTSE 100 will top 8000pts at some point in the New Year; certainly equities appear to remain more attractive than bonds and cash but history shows that a 5% to 10% correction has often been a function of healthy markets and that possibility should not be dismissed if things were to reset.

‘A mishandled withdrawal is just one of the factors that could deliver a dreaded ‘cygne noir’ event in 2018’

Whilst growth companies have filled their boots as a result if what was termed Trumpflation, those looking to unlock value in unloved or unnoticed companies have found things more difficult this year; however, those looking for a bargain in 2018 may decide that these companies remain cheap enough to warrant another look, and an efficient way of doing to may be via a special situations fund.

There is little doubt that the global economy ends 2017 in rude health; all 45 countries tracked by the Organisation for Economic Cooperation and Development (OECD) registered growth in 2017, with 33 of these showing accelerated growth over 2016, which is the first time since 2007 that all countries are growing in sync, with the most countries in acceleration since 2010.

Such simultaneous growth is rare; other than 2007, in the last 50 years it has only happened in the late 1980s and for a few years before the 1973 oil crisis, so the backdrop as we move into 2018 indicates no great cause for concern of an imminent correction.

Whilst the current bull market may have some making pronouncements of impending doom in the inimitable style of Private Frazer, for the sake of context the current bull market has seen the FTSE 100 add around 90% since it began in 2009; compare that with the 340% it added between 1987 and 1999 and optimists will tell you that markets have plenty of headroom.

However, ever since Bobby Kennedy put a positive spin on an ancient Chinese curse, we do indeed live in the ‘interesting times’ that he described as ‘times of danger and uncertainty; but they are also the most creative of any time in the history of mankind’.

So, no pressure then as you seek to ensure your portfolio is ready for any eventuality in 2018.

‘times of danger and uncertainty; but they are also the most creative of any time in the history of mankind’

However, surely such uncertain times call for a ‘back-to-basics, invest for the long-term, strong and stable, well-diversified, risk-adjusted, don’t lie awake fretting’ approach.

Well, every fibre of this DIY investor’s being would say so, and really hope to believe it; but could it be that this time things really are different? Are markets going to defy logic, are the robots going to turn investment management on its head?

Surely the one truism that will set things straight is that the tortoise always beats the hare, right?

Slow and steady over the long term always beats the impetuous gambler – investors beat traders, yes?

As you cogitate over your diversified, risk-adjusted, hermetically sealed portfolio, you might want to take a look at the latest update from The Great British Trade Off.

Fagin vs Humbug, trading vs investing, £100k of their own money; I suspect by now you can see where this is going – eight months in, Fagin is £40,775 up and the best part of £45k ahead.

‘We believe that well educated investors with access to good information make decisions that improve their long term financial wellbeing’

That’s it then, the world’s clearly gone bonkers, but the minute you depart from making investment decisions without doing some thorough research and ensuring that you are comfortable with the risk to which you are exposed, you might as well tear up the DIY Investor’s rulebook (something for 2018?……Ed)

That is not something that DIY Investor recognises. We believe that well educated investors with access to good information make decisions that improve their long term financial wellbeing; that sits very comfortably with us as we seek to engage with the next generation of investors.

However, if you disagree and want to force the pace – why not just take Lucky Jim, on the nose, in the 2.30pm at Kempton Park; or perhaps go the whole hog and clamber aboard the Bitcoin bucking bronco?! It won’t be boring, but such punts rarely have a place in a successful long term investment strategy.

 

As financial self reliance necessarily replaces dependence upon the State; as the requirement to invest for tuition fees or the deposit on a property; as the need to control your own retirement planning or to ensure that later life care costs do not get passed down rather than the fruits of your working life, as we say – Do it Yourself, Do it With me, Do it For me – just don’t do nothing!

 

As we contemplate 2018, we believe that the need for DIY Investor has never been greater; have a safe and prosperous New Year, and we’d very much like to hear from you with any thoughts or suggestions – ask@diyinvestor.net

 





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