PERSONAL FINANCE

Good deal on Brexit could see international investors return to the UK 19

THIS year turned out to be the one when markets climbed a wall of worry. Much of this emanated from the world of politics, with Donald Trump taking office in the US, the Tories losing their parliamentary majority, the start of Brexit negotiations, elections across Europe and rising tensions with North Korea.

Yet despite all this noise, 2017 turned out to be yet another year of healthy returns from stock markets across the globe.

The S&P 500 Index of leading US companies is set to end Trump’s first year in office having delivered a positive return in every single month – the first time ever this has happened in a calendar year. With major US corporate tax cuts now set to be implemented in 2018 this should provide some momentum in the form of increased dividends and share buybacks.

Against this background the currently unloved UK stock market as measured by the FTSE All-Share Index was a relative laggard, but nevertheless posted a very respectable 10.9 per cent total return year to date.

At the sector level, 2017 was an extraordinary year for returns on technology and new media stocks. Apple, Microsoft and Amazon are now the three largest companies by market capitalisation on the entire globe, with Google-owner Alphabet not far behind and Chinese internet firm Tencent also making it into the top ten.

Between them, these five stocks now have more representation in the MSCI AC World Index – the broadest measure of global equity markets – than individually either the entire UK, French or German stock markets. Over 18 per cent of global stock market capitalisation is now represented by information technology companies. Valuations on technology companies are undoubtedly rich, although they are not yet at the stratospheric levels seen during the dot-com bubble in the late nineties.

Will the good times continue to roll? There are certainly siren voices warning of a potential correction – or worse – yet bull markets do not die of old age. They are typically stifled by either a deterioration in economic fundamentals, policy errors by central banks or unforeseen shock events.

As we head towards 2018, there are reasons for cautious optimism: the global economy is in decent shape and inflation is not a problem across the globe and should subside in the UK. While the tectonic plates are undoubtedly shifting in monetary policy with China already reining in credit growth, the US Federal Reserve expected to lift rates three times in 2018 and the potential for a further rate rise in the UK, credit remains abundant and the expected pace of monetary tightening is a long way off from slamming on the brakes.

But investors do need to tread with caution towards those parts of the market where valuations have become extreme, such as technology and new media shares, and perhaps be a little more discerning than simply being in the market. As the crutch of support from abnormal monetary policy is gradually withdrawn, stock specific fundamentals should become more important after years when massive monetary stimulus has lifted all ships with the rising tide.

At a time when bargains are hard to find, emerging market equities are one of the few areas where valuations remain below long-term trend despite strong share prices rises last year. Europe, where the recovery has momentum and earnings growth is forecast to be a healthy 12 per cent in 2018, remains another bright spot.

The potential wild card for 2018 could be the UK, which has been shunned by investors during 2017. While the economy faces headwinds from continued political uncertainties, negative sentiment means companies exposed to the domestic economy are cheap.

If the UK and EU do make progress towards a mutually agreeable future relationship, a lot of current anxiety could evaporate and international investors could return to the UK market.