It was a remarkable year for share markets in 2017, with major markets across the globe notching returns of around +20% for the year (for the year the US Market was up +19%, NZ Market +22%, AU Market +7%). What was more surprising than the strong returns experienced in 2017, was the way in which they were achieved – with what was close to an absence of volatility.
Despite the fact that markets are at high levels, we remain constructive towards shares in 2018. Our view is that there are “real drivers” behind the market rally, with returns driven by co-ordinated global growth & economic strength, as companies continue to experience earnings momentum. Importantly, low inflation has meant there is still relatively accommodative monetary policy. These factors have created a breeding ground for equity returns.
In saying that, we are aware that it is a question of “when” not “if” a market correction will occur – particularly given we are heading into the 8th year of the bull market post the Global Financial Crisis in 2009. Given economic growth is likely to remain solid in 2018, the factor at risk of changing in the year ahead is an end to accommodative monetary policy. On this front we see the primary risk being higher interest rates driven by the return of inflation or a central bank policy error. Hence our year ahead title, Watching Rates Like a Hawk.
We point out that some of the best share market returns can be made in the late stage of a bull market and see more opportunities in the Australian market over the NZ at the current juncture.
Overall, we remain cautiously optimistic for 2018 and continue to invest in stocks as normal, although we would not be surprised to see a bit more of a bumpy path for share markets over the year ahead.
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