The 2018 markets so far: Sea of uncertainty

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Compared to 2017, the stock markets during the first months of 2018 were far from calm. In 2017 we saw a perfect storm for steep stock market increases with low volatility.

2017 was an interesting year for the markets. Governments across the globe created a perfect environment for stock markets to increase in both developed and less developed economies. The global economy in 2017 continued to experience a synchronised expansion, with the risk of a global recession remaining low, but going forward into 2018 we have seen the waves begin to crash. 

With US stocks generating an astronomical (and unsustainable) performance of 28% for 2017, a market correction (defined as a decline of 10%) was not unexpected.  In fact, it has been long overdue. 

We saw US stocks start 2018 strongly off the back of favourable US tax reforms meaning US companies can pay less taxes to the US government, boosting their profits. However, we recently saw the 10% correction we were expecting.

Looking back, the last market correction over 10% happened during the 2008 crash and this latest correction has thrown up red flags that 2018 could be the start of the tides turning.

We have now started to see a slowdown in economic growth, which has been led by the powerhouse, China. The broad Chinese economy appears to be slowing down, as the government tightens financial conditions. Furthermore, China and the US are the most central economies in the highly integrated global trade network. With the US confronting China on multiple trade fronts, we could see tensions rise even further, causing further issues to the global economy.

The other big issue we have on our hands is the US and UK governments’ likelihood to further increase interest rates to combat rising inflation. This, of course, will increase the cost of borrowing debt for companies and encourage individual people to save money in banks to take advantage of higher interest rates. These could both lead to reduced money in the economy, which could contribute to slowing economic growth.

Matthew Shafer, head of global wholesale at ‎Natixis Investment Managers ($998 BN assets under management) said: “Professional fund buyers are facing a range of portfolio objectives that are made challenging by the current market environment.

“Whether they’re looking to generate income in a low yield environment, minimize the effects of volatility or enhance overall diversification, professional investors favour active management and expand their capabilities with alternative investments.”

According to International Adviser magazine “Over half (58%) identified private equity as an effective strategy to generate stronger returns, with a third (31%) also highlighting private debt”.

We cannot say anything with absolute uncertainty, however, with peaking global economic momentum and political risks, we certainly expect elevated stock market volatility on the horizon.

This is, in turn, putting pressure on IFAs to find alternatives for their clients, as they are hungry for yield in a period of volatility.