Investors are hoping for 2017’s good economic conditions to continue into the new year, but they should not grow complacent about risks, says Morningstar.
Morningstar’s December 2017 Economic Update has warned investors against holding too rosy a view of global equities for 2018 off the back of strong economic fundamentals.
“In the US, the economy continues to do well … and the global economy has been strengthening,” the Morningstar report read.
“Investors who backed the current synchronised global business cycle have been richly rewarded, and the current outlook suggests the cycle has further to run.”
However, Morningstar analysts cautioned investors against failing to pay heed to risks.
“Investors in US shares, for example, were alarmed earlier in the year by the North Korean atomic weapons scare, as they should have been,” the report said.
“But going by the VIX measure of expected volatility in S&P 500 share prices, they did not get very worried by comparison with previous unsettling episodes, and they did not stay alarmed for long.
“The VIX is now back to all-time lows, as are similar measures (for example, expected volatility in bond prices, which is also exceptionally low).
“Investors no longer see much of a threat from Kim Jong-un, or indeed from anyone or anything else.”
A number of factors had constituted “good economic conditions”, such as the rise in job numbers, the Republicans’ tax cut reform, the lack of negative investor sentiment regarding the Federal Reserve’s rate hikes and growth elsewhere in the global economy, such as emerging markets.
“The Economist’s collation of forecasts for virtually every country of any importance continues to show ongoing growth next year, with remarkably strong GDP growth expected for the two emerging-markets powerhouses, India (7.4 per cent) and China (6.5 per cent),” the report said.
Going into the new year, investors were hoping it would bring in the same favourable conditions.
“It could well do,” it said.
“But investors should be aware that, in the US, they are buying into assets which are expensive this late in the current US business cycle, that the tide of monetary policy liquidity that has supported equity prices everywhere is starting to go out, and that the true level of geopolitical and other risk is actually higher than is currently allowed for in asset valuations,” the report said.
“Investors appear to be systematically discounting true levels of risk, and it is difficult to see how 2018 will be able to repeat 2017’s strong investment returns.”
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