After a record breaking 2017 for the FTSE100, one of Yorkshire’s top IFAs believes that a sense of cautious optimism will prevail among investors in 2018.
The UK stock market hit all-time highs in 2017 underpinned by record dividend payments and monetary stimulus. It wavered after the election, but was supported by the Bank of England’s monetary policy which kept interest rates low.
On the last trading day of 2017, the FTSE100 closed at 7687, this was a year-end gain of 7.6%. The FTSE 250 closed at 20726, a gain of 14.65%. The FTSE All Share closed at 4221, ending the year with a gain of 9%.
The question raised by investors at this time of year is whether the problems perceived at the outset of 2017 have been simply been postponed until 2018.
Antony Barton, IFA at Robertson Baxter, believes “a spirit of cautious optimism will carry into 2018, although caution may overwhelm optimism as the year wears on.”
International factors played a key role in the strong performance of the stock market over the past 12 months. Pro-business and pro-growth policies in China and the US, such as infrastructure spending and tax cuts, boosted gains.
The performance of Sterling was also a factor. The uncertainty over a Brexit deal kept the value at multi-year lows, which had a profound effect on companies that generate their revenue from outside of the UK (71% of the FTSE100).
“Currently valuations appear stretched, underpinned by low inflation and low interest rates,” said Antony. “Both Japan and Europe should however benefit from expanding profit margins giving it room to catch up with the rest of the world.
“Inflation and interest rates should rise in 2018, but should not get out of hand. Emerging markets should be supported by growth and low inflation.
“Chinese valuations look stretched; growth may slow, but domestic consumption and investment should hold prices firm.
“Domestically, if inflation is kept in check, global bonds should not suffer much downside, but it will be important that policymakers maintain the “goldilocks” combination of strong growth and low inflation as Quantitative Easing (QE) is withdrawn.
“The main risk lies in inflation,” he added, “as governments try to reduce taxes and raise infrastructure spending to stimulate economies.
“A balanced diversified portfolio with a readiness to ratchet down risk should circumstances demand it would seem a sensible approach to navigate the year ahead.”