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Market prospects in 2018

For 2018 we are optimistic that markets can post further gains, although the scale of returns achievable by each market depends in large part on how much of an improvement in market fundamentals - stock market profits or rents, for example - that we see in each market.

Stock market profits are expected to grow strongly in 2018. Assuming this growth is realised, mid-to-high single digit total returns from equities are achievable in 2018. As always, currency will be a swing factor which could either add to or detract (as was the case in 2017) from returns for Euro-based investors.

Our positive economic outlook, coupled with upside inflation and central bank risks, suggest a challenging year is in store for bond investors in 2018. We don’t see a market slump as likely, rather a year where returns are low to slightly negative again – perhaps in a range of +2% to -2%.

In foreign exchange markets, we believe it will be difficult for the euro to back up its 2017 gains, particularly against the dollar. Interest rate increases by the US Federal Reserve should help the dollar versus the euro, particularly during a first half which will feature a closely watched Italian general election. This election should set the tone for the euro later in the year. In the absence of a shock, the focus should turn back to the Euro zone recovery and the ECB’s Quantitative Easing taper, meaning the momentum could swing back to the euro in the second half of the year. So, all-in-all our best guess on the euro/dollar exchange rate is for a more up and down year than in 2017.

From a long-term perspective, the future returns achievable from each of the main asset classes are likely to be lower compared to historical norms. However, for 2018 we are optimistic that markets can post further gains. Investors saw growing signs in 2017 that we are approaching the latter stages of this economic cycle. Further progress on inflation targets and another step back from central banks’ loose monetary policy should be further signposts for this in 2018. However, strong economic performances always form the centrepiece of such a late-cycle picture. This very much remains the case and should be the key driving force for risk assets in 2018.