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Strategy

Forecast: Cautiously upbeat

Forecast: Cautiously upbeat

Mark Dunne
Tuesday 23rd January 2018

Conditions are expected to support risk assets again this year, but investors are advised to carry a healthy dose of caution. Mark Dunne takes a look at what the next 12 months could hold for investors.

“Overall 2018 looks capable of being as rewarding for investors as last year, although it will probably be more ‘exciting’.”

Stephen Jones, Kames Capital

2018 could be another favourable year for equities, but the mood among investors is set to change. A backdrop of strong evenly-distributed global growth, a weak dollar, an improving oil price and low inflation will benefit risk assets this year.

However, with the growth cycle reaching its eighth year and with a tighter monetary policy investors should adopt a more cautious tone.

Equities in the eurozone, Japan and the emerging markets are favoured by economists and fund managers this year, believing them to be better value than those trading in the US and the UK. Developed market bonds and cash appear not to have made it onto many asset managers’ shopping lists this year.

The place to be in the fixed income space appears to be the emerging markets where local currency debt is expected to benefit from a weak US dollar and an inflation-free economic recovery.

“Overall 2018 looks capable of being as rewarding for investors as last year, although it will probably be more ‘exciting’,” Kames Capital chief investment officer Stephen Jones says.

Rising interest rates and fears that the US and North Korea could start firing nuclear missiles at each other did not stop the FTSE 100, S&P 500 and Japan’s Topix hitting record highs in 2017, largely thanks to positive profit surprises and a scarcity of volatility.

Things could be different this year says Jones, who does not expect to see many earnings surprises. “Forecasts for growth and profits are now much more realistic.

“It is probably naïve to anticipate that markets will go up in a similar ‘straight line’ as they did last year,” he adds.

Jones is not predicting a crash; nor is he ruling out further equity gains. “Investors should not lose faith in equities this year,” he says, pointing out that the economic outlook in Europe and Japan looks ‘solid’.

Bonds are another factor that could help equities maintain their attractive risk-reward profile, even at a time when valuations look stretched.

Jones predicts that bond yields will continue to support equities, unless there is a substantial rise in inflation, which he doubts there will be.

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