For the first time in its history, the S&P 500 posted positive performance for every single month in the year 2017. Indeed, it would be surprising if such low volatility continued throughout 2018.
In December, most equity market indices continued in good heart. In local currencies, the S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets (in USD) went up respectively. Over the full year 2017, the strength of the euro slightly took the edge off the equity markets’ good performance for European investors. “Low volatility was a key feature of the financial markets during 2017”, says Guy Wagner, Chief Investment Officer and managing director of the asset management company BLI – Banque de Luxembourg Investments. “For the first time in its history, the S&P 500 posted positive performance – including dividends – for every single month in the year, illustrating the steady nature of the rise in share prices. In 2018, the environment should remain favourable for equity markets, but volatility risks to increase.”
Asia is still the region posting the highest economic growth
The global economy maintained a sustained pace of growth at the end of 2017. In the United States, early estimates point to favourable retail trade figures in December, boosting fourth-quarter economic growth. In Europe, activity indicators for the manufacturing sector and services continue to produce positive surprises, with a series of record highs. In Japan, business confidence measured by the Bank of Japan suggests investments will pick up in the coming months. According to the Luxembourgish economist, “Asia is still the region posting the highest economic growth, even though the Chinese authorities’ efforts to address the problems of bad debt and pollution are likely to weigh slightly on the economy in 2018”.
The bond markets still hold little appeal
In the United States, bond yields saw little change at the end of the year. Despite finalisation of the tax reform, which should help economic growth pick up at the expense of further deterioration in the public finances, the yield on the US 10-year Treasury remained unchanged. In the eurozone, long-term yields rose slightly on the back of economic statistics continuing to come in above expectations. The 10-year government bond yield rose in Germany, in Italy, and in Spain. Guy Wagner: “Generally speaking, the bond markets still hold little appeal.”
In 2017, the euro appreciated by 14% against the dollar
The euro ended the year on a strong note at $1.20 at the end of December. Over the full year 2017, it appreciated by 14% against the dollar. “Even though President Trump signed the tax reform bill into law in the United States, the dollar could not recover lost ground against the euro. Despite political uncertainties in Germany and Italy, the euro’s rally continues to be driven by the strength of economic activity in the Eurozone”, concludes Guy Wagner.
Guy Wagner, chief investment officer at BLI – Banque de Luxembourg Investments