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QUARTER 4 2017 ECONOMIC LOOK-BACK
Consumer (over) confidence?
During the final three months of 2017, consumer confidence levels hit 17 year highs across Europe and the US. In other words, not since the final three months of the year 2000 have consumers been so confident about the outlook. While obviously a positive sentiment indicator, it is not always a good predictor of stock market performance. In the 2 years following the peak in 2000, the tech bubble burst and global stock markets fell almost 50%. The key difference between then and now is that valuations were nearly 50% higher then, which was a significant cause of the collapse. Strong consumer confidence is important but it is not everything.
Towards the end of the year, US Congress finally agreed a fiscal stimulus programme for the US. In December, Donald Trump finally signed the much awaited tax bill which incorporates a US corporate tax rate cut to 21%, a reduction in income tax rates and bands and the full tax expensing of investments over 5 years. In total, the package is said to be worth approximately €1.4 trillion over 10 years and designed to boost US growth by around 0.5% over the next 2 years. This is a significant result for Trump as the first key piece of legislation to support many of his campaign promises. Any subsequent challenges or revisions would be yet another setback for the embattled President.
Penne for your thoughts…
The Italians are due to go to the polls on 4 March 2018. Although the eurosceptic Five Star Movement is leading the polls currently, investors are much less concerned about the risk to the EU of Italy potentially looking to leave. The Five Star Movement itself has significantly toned down anti Europe rhetoric in recent months and indeed is suggesting they want to stay in Europe and make it a better one for Italy. Interestingly, recently passed electoral law favours parties working together in pre-election pacts. Since the Five Star Movement refuse to work with any other parties, their chances of being part of the next coalition are seen as relatively low.
Shares, bonds, commodities and currencies…
The MSCI AC World equity index rose 5.5% in the last three months of 2017 in local currency terms (but 4.2% in euro). The US was a strong performer - up +6.6% over the same time period (+4.9% in euro). Meanwhile, Europe was broadly flat (down -0.6% in euro) and Emerging Markets rose +5.7% (+5.8% in euro). Japan was the leading major market posting a very strong +8.6% (+6.8% in euro). Closer to home, the UK rose +4.9% (+4.1% in euro) underperforming slightly in light of the ongoing distraction surrounding Brexit talks, relatively sluggish growth and the 0.25% interest rate increase. Finally, the Pacific region was up +7.1% (5.4% in euro).
In bond markets, the eurozone >5 year sovereign bond benchmark rose +1.0% during the quarter as German 10 year yields fell slightly to 0.43% on the back of relatively low inflation. In currency markets, the euro continued to rise against the US dollar, moving to just over 1.20 by year end as the European Central Bank (ECB) announced a reduction in asset purchases from €60 billion to €30 billion per month from January 2018. The asset purchase programme is scheduled to remain in place until September. Commodities rose +9.9% (+8.2% in euro) with WTI oil up +16.9% as OPEC confirmed that production cuts would be extended to the end of 2018.Source: David Haslam, Head of Retail, Irish Life Investment Managers (ILIM), 31 December 2017.