Following a strong 2016, this was another positive year for investors.
Markets benefited from a number of underlying factors, but the primary driver behind this successively triumphant period was an increase in corporate profitability (how much money a company makes).
For example, in the second quarter, at least half of US companies surpassed or met expectations on corporate profits (in every sector), with many also benefiting from the falling US Dollar. In quarter three, we saw corporate profitability continue to improve.
Over in Europe, corporate results were also high – as the first quarter of earnings provided the best growth in seven years, with valuations rising well above long-term averages.
Scott Ashworth, Senior Technical Research adviser at Skipton stated, “Despite the positive economic growth that we’ve seen since 2009, corporate profitability has been unable to exceed market expectations. Stock markets have been driven by other factors, such as central bank monetary measures, rather than strong corporate results. You can have good economic growth, but if it isn’t feeding into corporate profits then generally it isn’t as supportive of shares.
“This year, however, was different. Expectations were surpassed – and as a result, markets inevitably reacted well.”
A good period for asset classes
Shares generally performed well across the year. Europe generated strong returns within the first few months. Although they began to lose momentum in May, overall they enjoyed a positive year.
Emerging markets kicked on over much of the second half of the year, primarily due to good economic growth and partially from the weakness in US Dollar. After struggling for years, this region began to recover in 2016 when commodities (e.g. oil) finally bounced.
Since the global financial crisis, fixed income has been strong – helped by falling yields. Corporate bonds performed reasonably well, whilst government bonds experienced some volatility. Despite the small dips, this asset class enjoyed a positive year on the whole – generating some strong returns.
Promise of US tax cuts fuels stock markets
Over in the US, Donald Trump has almost completed his first year as president. No one else has generated more headlines than Trump over 2017.
Although many of Trump’s campaign promises have yet to be fulfilled, one key success has been his objective to reduce taxes for individuals and businesses in America. At the end of 2017, his tax bill was formerly approved by Congress and the House of Representatives.
Markets reacted positively towards the prospect of tax cuts, as businesses stood to significantly benefit from them. Trump has also talked about scaling back industry regulations. Markets, which had already been buoyed by strong corporate earnings, continued to post record-highs throughout the year.
Daniel Howard, Technical Research Manager at Skipton added, “Whatever some people think of Trump, the prospect of his tax policies have had some benefit to markets over the past year. What is unclear moving into 2018 is just how much markets have already priced in to sufficiently match the potential extra growth.”
The US Federal Reserve increased interest rates three times over the year – signalling its confidence in the strength of the US economy.
The long and winding road to Brexit
Closer to home, it was impossible to avoid the topic of Brexit over 2017. The government’s negotiations to leave the European Union have been fraught, with many twists and turns. Exactly how they were expected to be.
Yet beneath the headlines, the big story for investors has been the impact on currency movements. 2017 was a good year for Sterling, as it clawed back some of the falls it endured in and around the 2016 EU Referendum. However, it continued to weaken against the Euro.
Whilst this has proven less beneficial for investors with global funds, they still broadly performed in line with UK funds (the UK economy expressed concerns over its slow growth throughout 2017). Overseas profits shrunk when they were converted back into Sterling – a reversal of last year. Another notable economic development in the UK was the first interest rate rise in a decade, with base rate brought back to the pre-EU Referendum level of 0.5%.
UK shares themselves have generally fared well over the year, although they have still lagged behind other key regions – which was not helped by the uncertainty over Brexit negotiations. Companies have been boosted by a rise in consumer spending, in spite of rising inflation meaning prices have risen. However, given inflation has proven higher than wage growth over the year, economists have warned the UK’s reliance on consumption will not last.
But everything in the UK comes back to Brexit. As the clock ticks down, Brexit is likely to prove an even bigger story in 2018 than 2017. In fact, the topic will probably dominate for years after. The media, markets and industries will continue to watch closely to see what’s agreed with the new relationship between the UK and EU.
Mark Elliott, Head of Financial Advice Risk & Research at Skipton, concluded, “It’s been another good year for investors. Markets have generally performed well over 2017 – just as they did over 2016.
“Whilst past performance is never a guide to future returns, history has shown strong stock market runs don’t last forever, and at some stage momentum may start to slow. Of course, no one can predict just when this might be.
“Markets will continue to face challenges. In 2018, for example, there remains uncertainty over the Brexit negotiations – albeit this is an issue with far greater significance in the UK than the rest of the world. Donald Trump will likely continue to prove unpredictable in the White House, while the US mid-term elections next autumn may change the political make-up of the country. Over in Italy, a general election is scheduled to take place in May.
“Meanwhile central banks around the world continue to grapple over interest rates and stimulus support, as they look for economic growth to prove more self-sustaining.”